It's all about the money: Questions to ask a franchisor

14/06/2018 17:00 | Start a business

What franchise investment is required

When you’re conducting your research into a particular franchise, there’s likely to be a lot of questions you want to ask. Some will relate to the franchise contract, others to the level of support you’ll receive, and a few to the nature of the franchisor/franchisee relationship. However, the most important questions you ask will likely concern money. Here, we take a look at the ten most important financial questions to ask a franchisor.

What investment to franchisors need?

1. What’s the total investment required?
When you’re researching a franchise, you’ll often encounter terms like ‘minimum investment required,’ ‘franchise fee,’ and ‘cost of franchise package.' All of these terms refer to something different, and none tell you exactly how much you can expect to spend setting up your business. What you want to know is the total franchise investment required. This figure should tell you how much you’ll need to cover the franchise fee, a lease, startup costs, and everything else necessary to prepare the business for the opening day.

2. How much working capital will I need to cover initial losses?
Businesses don't make a profit on their first day. Most don't make a profit in their first week. Few make a profit in their first month. Most begin to turn a profit sometime within the first year of business. However, up until this point, you'll need a healthy supply of working capital to keep everything ticking along. Though it can be difficult to know precisely how much you'll need, if you talk to your franchisor and other franchisees, they should be able to help you come up with an approximate figure.

3. How long before the franchise breaks even?
Over the opening period, you'll be forced to pump more and more money into your business, even though you're yet to break even. At some point, you'll be able to stop doing that, and you'll have turned enough of a profit to recoup everything you invested. However, the amount of time this takes varies from business to business and industry to industry. A franchisor may be able to provide you with a range (e.g. between January 2019 and September 2019), but even this may prove inaccurate. If they do offer a range, make sure you work to the later date, just to be safe.

4. How long will it take before I can begin drawing a wage?
You may have started turning a profit, but that doesn’t mean your business is in a position to pay you a wage yet. It may be that the profit is so negligible that it isn’t enough to support you, or it may be that you need to pump all the profit back into the business to ensure growth and market dominance. However, one day you're going to have to start drawing a wage and stop living off your savings. Knowing when this may occur allows you to budget and ensures you have enough to cover living expenses until your business can support you.

5. What percentage of my investment needs to be in cash?
All businesses require cash reserves, but the amount they need will differ depending on management, business, and industry. This means that it will be necessary to put up a certain amount of your investment in cash. While a high percentage may affect your ability to raise the investment, it doesn't change how the business operates. However, it is essential to know, as you don't want to find yourself cash-poor at just the wrong moment.

6. What traditional financing options are available?
When we talk about traditional lenders, we usually mean major banks and similar financial institutions. Many major banks are happier to finance new franchises than they are an entrepreneur heading out on their own, so there’s usually a few options available to franchisees. Many British Franchising Association (bfa) accredited franchises have developed partnerships with traditional lenders whereby anywhere from 50-70% of the investment will be covered by the bank. However, this very much depends on your circumstances.

7. What alternative financing options are available?
Though most franchisees opt to go with traditional lenders if they can, there are a wide range of alternative lenders to consider, too. For instance, franchisees could look to current crowdfunding sites, or ask friends and family if they would be willing to invest in your business venture. There are also many companies that will help individuals access funds in ISAs and 401k accounts if they're going to be used to finance a franchise.

8. What kind of profit can I expect to make in the future?
This is the big question and the one that everyone wants to know the answer to. Unfortunately, it's pretty tricky to answer. Most of the time, it will depend on how long the business has been operating for. As we mentioned earlier, some businesses don't make a profit in their first year. However, by their third year, they may be turning a healthy profit. One of the best ways to work this out is by talking to existing franchisees.

9. What does your best performing franchisee make and what does your worst performing franchisee make?
By asking what the franchise’s best and worst performers are making, you’ll get a good idea of what the extremes at each end are and know that you’ll probably fit comfortably somewhere within those two boundaries.

10. How financially secure is the franchise?
With a franchise it's essential to consider more than just your financial security, you should also think about the franchise as a whole. All franchises have to provide potential franchisees with a copy of their audited financial statements, so request them if necessary. Remember, you want a franchise that's not only financially stable but also able to invest in training and support.

Asking the right questions is an integral part of finding out the true franchise cost and whether a business is a viable investment. Don’t be afraid to ask probing financial questions – any honest, successful franchise won’t have anything to hide. However, you may have to sign a non-disclosure agreement before you receive an answer.

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