For franchisees, starting a franchise provides the opportunity to run your own business while minimising the financial risks associated. With an established, working business model provided to you, it’s far more likely that you’ll find success and profitability. One of your best resources ahead of franchising with a business will be your potential franchisor.
The franchising process can seem complicated and confusing to new investors in the sector, but there’s one key thing to remember: to make sure you’re maximising your chances of success with your chosen franchise, you’ll need to do your research ahead of time.
When you’re putting a substantial sum into an investment, don’t leave room for error. Make sure you’re prepared, and feel as confident as possible about the finances of your future franchise. Here are 10 finance-related questions to ask franchisors ahead of solidifying your investment.
10 important questions to ask franchisors before investing in a franchise
1. How much is the total investment?
The initial investment costs and ongoing monthly costs will differ hugely between franchises, depending on a number of factors including:
- Size of franchise network
- Type of franchise
- Franchise location
That said, the average cost of establishing a franchise operation in the UK stands at £42,200 [British Franchise Association]. As you request details from your franchisor about the costs involved in doing business together, don’t forget to chase up additional costs like franchise fees, leasing costs and start-up costs (and whether any of these will be covered).
2. How much working capital will I need to cover my initial losses?
Even for businesses in the franchise world, who often enjoy customer demand before doors even open, making a profit within the first month or so is rare. Most franchisees are able to turn a profit within the first year, but while waiting for this moment to arrive, you’ll need to be sure that you have a healthy supply of working capital to keep everything afloat. You can gain a better idea of the amount you’ll need, and the time you’ll take to reach profitability, from your franchisor.
The reality is that the first three months are hard. You’d be lucky to make any money at all while you’re starting to find clients and have a 30-day invoice period, so it’s important to have a nest egg of savings.
—Richard Langrick, Ashtons Franchise Consulting
3. When will the franchise break even?
You won’t be able to determine an exact date on which your franchise will break even, but a franchisor should at least be able to give you a general idea, based on their existing franchisee examples. You might choose to calculate your break even point in units, but this, of course, won’t give you an exact date and time.
Between your efforts, the input from other franchisees and a discussion with the franchisor, you'll arrive at a fairly accurate financial picture of the business. After taking this back to your accountant and getting their professional input, you should then have a clear sense of when you’ll break even.
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4. When will I draw a wage?
By joining a franchise, you are maximising your chances of financial success. And by checking out your prospective franchise’s financial potential first, you can weed out any options that look as though they offer a poor profit margin or take an excessive amount of time to become profitable without good reason.
However, if you pick the wrong concept, there’s no guarantee that:
- You’ll make a wage
- You’ll make a wage by a certain time
- You’ll make a wage of a certain amount
The guesswork and informed estimation you do to determine your break-even point and the point of profitability for your franchise will help, and again, the experience of other franchisees working with the company will be your best bet for figuring out a solid estimate.
5. Does a percentage of my investment need to be in cash?
While you won’t need to hand over a wad of cash to your franchisor, you will need ‘cash’ in the form of liquid capital. You’ll need this reserve, in addition to any loans you secure, to cover the investment cost. It could be savings, investments that you can easily turn into cash or a steady additional form of income (perhaps from a partner or side hustle) that can support you until your business is profitable.
All business investments will require cash reserves, including franchise investments. The amount required will differ considerably based on a number of business and industry specific factors. Ask your franchisor, get a clear answer, and ensure you don’t find yourself cash-poor.
6. What are the traditional financing options?
The most traditional form of financing your franchise, if you don’t have all the cash upfront and ready to go, is via a bank loan. Most UK banks will be willing to loan between 50-70% of start-up costs. In fact, most banks have dedicated departments for handling franchising, and you’ll be able to refer to these for expert support.
To successfully apply for a bank loan of this type, you’ll need to prove that the franchise you would like to invest in has been vetted, and you’ll need a good credit history to your name. Ask your franchisor about financing to ensure that you can learn of any financial support on offer, and any issues that might have come up for previous franchisees.
7. What are the alternative financing options?
There are several other avenues for franchise financing available if, for some reason, a bank loan isn’t right for you. Your franchisor should be able to inform you exactly which options are available for your specific franchise, but examples of alternative avenues include:
- Government start-up and new business schemes
- Sector-specific opportunities and offers
- A loan from a company like Franchise Finance
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8. What profit can I expect?
Ninety-three per cent of franchisees claimed profitability in 2018 [British Franchise Association]. Figures differed depending on the franchise type. Though your franchisor will hopefully be able to be more specific, here are some example percentages of franchises in various sectors that claimed profitability:
- Hotel and catering franchises - 96%
- Business services franchises - 76%
- Retail franchises - 78%
- Franchises operating out of a shop/retail premises - 93%
- Franchises operating from home - 73%
Your franchise, at the end of the day, is a business under an umbrella. It can create its own value based on how you operate the business. I have seen many single-unit franchised businesses in my time that are worth a lot of money. Yes, the brand and sector can help, but it’s the franchisee running the business that makes it valuable.
—Michael Bohan, Franchise Resales
9. What does your best/worst performing franchisee make?
Your franchisor should be able to provide specific figures in answer to this question, and by asking it, you’ll gain a better understanding of your potential financial highs and lows. This will help you to prepare, make you aware of your progress, and hopefully allow you to ensure that you’re fitting comfortably between the two numbers.
10. How financially secure is the franchise?
As well as considering your own financial situation, you should be questioning the security of the franchise as a whole. When becoming a franchisee, make sure you request a copy of the franchise’s audited financial statements.
An in-the-know franchisee is a successful franchisee
Running your own business is an exciting prospect, but when you’re working with a franchise, it’s important to gather all the knowledge you need, financial and otherwise, in order to find success. Make sure you do as much research as you can, and don’t be afraid to ask even small and specific questions. To find the perfect franchising opportunity for you, browse Point Franchise’s extensive UK franchise directory.
Cara Squires, Point Franchise ©