Buying a franchise can be a very fun and profitable venture. But as you very well know, not all franchises are created equal. That’s why it is extremely important you take the time to do a little research before you take the leap.
This is known as the franchise discovery process and it can help you better determine if a franchise opportunity is right for you.
With that being said, here are 5 financial questions you should ask when comparing franchises to buy.
1- What Is The Total Upfront Investment?
You need to have a clear understanding of all upfront costs associated with the franchise. This will usually include franchise fees, initial inventory, equipment, and any other startup expenses.
Understanding the initial investment will help you better assess if this is an opportunity you can truly afford. Generally speaking, you can find this information in the Franchise Disclosure Document.
2- How Much Working Capital Is Needed?
Working capital is the money you will need to actually run the business. This would include expenses such as equipment, utilities, inventory, payroll, royalties, and the cost of a lease.
Being that this is a business, there will always be unexpected expenses that arise. Always leave yourself a cushion when it comes to working capital.
To truly understand how much working capital you will need, reach out to current franchise owners in your area.
They have boots on the ground and can give you a more accurate representation of how much it will cost you to run the franchise on a monthly basis.
3- How Long Will It Take To Make a Profit?
The goal of every business is to make money. Not just revenue, but a healthy profit. While no one can guarantee you will make a profit in a certain amount of time, having a ballpark estimate will help you set realistic financial expectations and plan accordingly.
4- What Are The Ongoing Royalties?
Most franchises will charge an ongoing fee known as a royalty. This fee with either be based on sales, or a flat monthly rate. Clarify this fee upfront as it will be something that will eat into your profit margins.
5- What Financing Options Are Available?
When it comes to financing a franchise there are usually several options available. Some options include getting a bank loan, an SBA loan, vendor financing, or financing backed by the franchise.
For many, financing the franchise is the biggest hurdle they have to jump. Knowing what options are available can make the startup process go a lot smoother as you will not have to worry about securing funds.
Taking the time to evaluate the financial viability of a franchise opportunity ensures you are able to make an informed decision that is in line with your short-term and long-term financial goals.
It also helps you minimize risks by revealing any potential pitfalls that could ruin you financially.
As previously stated, opening your own franchise can be a very fun and profitable venture. But that can only happen if you do the necessary research upfront.