When you decide that the franchise model is right for you, you’ll have only answered the first of many questions that need to be addressed before you invest. But the most important of all the questions that you need to consider is ‘what franchise opportunity can I afford to invest in?’.
Firstly, you must appreciate the real cost of buying a franchise. This can be difficult because every franchise has its own financial requirements, so the costs vary hugely from franchise to franchise. Generally, you’ll be required to pay a franchise fee, all set up costs (including refurbishing, branding of premises, stock and equipment) and professional fees.
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The franchisor will not subsidise any of these costs so you need to consider the total investment cost, rather than looking at just the franchise fee. Remember, that you must also ensure that you have adequate working capital, not just to start your franchise, but to stay in business until it breaks even.
Finding the right franchise model for you
There are many factors to take into consideration when choosing a franchise and it can be challenging to find the perfect fit with both your personal and financial goals.
If you’re looking to start a franchise to achieve a more enjoyable work / life balance, for example, then choosing a well-known, established brand may not be the answer. Yes, they may have a ready-made customer base, but they’re usually expensive to acquire, demand long working hours with very low profit margins.
Investing in low cost franchise opportunities may be more suited to enabling you to achieve a more balanced lifestyle. This may mean that you have to invest in a lesser known business, but very often you’ll have the option to run a part-time franchise, which can help you achieve your personal goal, as well as having the potential to be a lucrative business.
Finding the right franchise model for your pocket
To determine what you can afford to invest in a new business, you need to have a good understanding of your current finances. This will help you work out how much you can contribute to the franchise cost and how much you need to borrow.
The best way to do this is to write a full list of your personal expenditure. The purpose of this list is to identify how much money you will need to take out of the business to live comfortably. Be honest, because not accounting for all your outgoings will leave you short when it comes to starting your franchise.
There are many low-cost franchise opportunities which are priced at a level that you may have be able to afford without the need to raise additional funds. For more expensive investments, it’s important that you realise that you’ll be expected to contribute towards the cost of the franchise. This amount can range between 30% for more experienced franchisees, but more likely to be closer to 50% for newer franchisees.
The remaining funding for the franchise can be financed by your bank. There are a number of finance options available for you to consider. It should be remembered though, that once you have financed the franchise fee and start-up costs, there are often royalty fees and marketing fees to pay regularly when you’re up and running.
Consulting a financial advisor that specialises in franchising is sensible at this stage because they can review your expenditure and help validate how much you can afford to invest without compromising other areas of your life.
Steps to finding the perfect franchise fit
Step 1: Understand which franchise model best suits the lifestyle you want to achieve
Although running a profitable franchise is hugely important, it’s not the only factor that should influence your decision in where to invest your hard-earned money. If the franchise doesn’t help you achieve your personal goals, you may not have the passion and dedication to make the business a success.
There are lots of franchise opportunities that can allow you to work flexibility around personal commitments; and plenty that don’t. Consider part-time franchise models, or opportunities that can be run from the comfort of your own home if you’re looking for an improved work / life balance.
Step 2: Read the Franchise Disclosure Document (FDD) and brochureware carefully
A Franchise Disclosure Document should have all you need to know about the franchisor and the franchise you’re looking to invest in. This should include financial information such as the minimum required investment, as well as disclosure of all set up and ongoing fees. It should also include a full history of the franchisor, projected annual turnover figures and the franchisee’s obligations to the franchise.
You should review this, and any other documentation that the franchisor has shared with you, to ensure that you have full awareness of all the costs associated with running the franchise. Only when you’ve understood all financial elements of the business can you make an informed decision.
Step 3: Consult a specialist franchise solicitor
The FDD will be just one of several documents, many legally binding, that you’ll be asked to review during the franchise recruitment process. These can be lengthy and complex so consulting a specialist franchise solicitor is strongly advised.
Your solicitor will be able to help you understand the complicated franchise terms and acronyms that are contained within the FDD and the franchise agreement. This will allow you to start your business with the confidence that you’re aware of all your obligations and responsibilities.
Step 4: Perform thorough research
If your franchise business doesn’t turn out to be what you expected, or it ends up costing you more money that you anticipated, this could be because due diligence was not performed.
Completing thorough research before you invest limits the risk of surprises taking place further on in your franchising journey. So, evaluate all the information that the franchisor gives you via telephone conversations, the FDD and during the Discovery Day. It’s crucial that you take advantage of each one of these learning opportunities and validate as much information as you can.
The Editorial Team, Point Franchise ©