The total cost of a franchise can vary greatly depending on many factors. Generally, there is an investment range, including the franchise fees, listed on the first page of the franchisor’s uniform franchise disclosure document (FDD). The total investment will include franchise fees, territory fees, training fees, technology fees, furniture, fixtures, start up advertising, deposits, computers, vans or cars, if applicable, insurance, working capital for a few months to include salaries and benefits. The FDD is divided into several items that detail costs and expenses to provide a range and average actual costs experienced by franchisees. All FDD will have some disclaimers or notes to further explain what is included and excluded because often it is hard to compare lease and real estate investment costs from one are of the country to another. Also, working capital requirements can vary greatly. The initial cost to get started will be explained in more detail in Item 5 of the FDD. The other costs are listed and explained in Item 6 and Item 7. It is important to read the footnotes carefully and understand what costs are one‑time costs and what costs are ongoing expenses. In publications about franchises, such as Entrepreneur Magazine or Franchise World, you can find a listing of franchise fees and general investment costs. However, it is always best to verify these financial ranges or actual numbers listed in the FDD and actually talk with the franchisors and franchisees during your due diligence.
Besides understanding how much the franchise may cost, you will also want to understand the ongoing costs of the business so that you can properly capitalize your business. Some are fixed and some are variable. Some franchisors provide more detailed financial representations of various aspects of the business in Item 19 - financial representations in the FDD; but most franchisors do not because their franchise units' financial results vary because some of their franchisee owners may work full time in the business while others manage the manager or some only work part time in the business, some are located in metro higher cost areas and others may be located in more rural areas. There are many reasons that make it difficult for franchisors to provide financial representations that are truly meaningful and even when some franchisors have been able to extrapolate a set of numbers to share for financial representations, your experience may be different because many times the success of your business will depend on what is referred to as the "YOU" factor - how well you work and implement the systems, sale and other aspects of building and running your business. Thus, the majority of the franchisors will want you to speak to owners who are running their businesses in similar demographic areas. You will also want to speak to owners who plan to work the business like you are wanting to run your business - either as an owner - operator or as a manage the manager or part time and those other owners who may have had similar education and experience as yourself so that you can better determine what your initial costs to ramp up might be and how long it will take you before your break even and what you can make. You will want to make a spreadsheet of known costs or estimates as disclosed in the FDD and them customize your spreadsheet based upon your own research. If the franchise does not have an Item 19 financial representations, you will be able to learn more about the earnings and profit potential of the business by speaking to franchisees and they will be willing to share details of how their business operates, costs and sales. Ask the franchisees if they can share a ledger of accounting so you do not miss a category of expense items. They also will share their experiences during start up and what their experience has been over the past years as they grew their businesses. Make sure you ask them when they started to learn if they were launching in a great economic climate or if they launched in a more recessionary time period so you can make adjustments to reflect the current economic condition. It is important for you to understand all aspects of the business so you are making good assumptions and developing cash flow projections that are relevant to your situation. You want to make sure you have appropriate working capital to cover your start‑up costs. You will also need to understand your personal living expenses and what income you will need during the ramp up phase of your business. At the beginning you may need to cover your salary from savings until the sales and your net income from your business increases. Many businesses make money fairly quickly, but to be successful, many invest additional sums back into marketing so they can increase their customer bases more quickly. Thus, it is really important to understand your personal needs as well as your company working capital needs to make sure you have appropriate cash or access to cash so you can focus on growing your business and not worry about how to pay the bills during your launch. And remember you need to factor in debt expenses depending upon how you capitalize your business as most owners will provide you sales and expense information before EBITA (earnings before interest, tax and appreciation). If you borrow funds to finance your business, you will need to also calculate the debt service (interest) and you will also need to factor in tax payments.
At the beginning, you may have to make certain assumptions. After you speak to the franchisees, you may want to readjust your assumptions based upon what you learned from the discussions you have had with franchisees during the validation calls. Franchisors can provide much more detail if they have provided financial representations in Item 19 of their FDD. If the franchisors have not provided Item 19 financial representations, you will need to speak to franchisees to learn those details. You will find that the franchisees understand your need for information and they will provide details to you about their experiences. After you have reviewed and compiled all of your information, you may want to actually visit a nearby franchisee and also seek the advice of a good small business accountant if your strength is not accounting and finance.
If you need to finance your business, before purchasing and signing any contracts, it is important to understand your financing options by seeking a loan pre-approval. There are many financing options and your eAdvantage4u consultant can help you by referring companies that specialize in certain types of financing, i.e., using retirement funds to fund (without penalty provided the funding is handled in a certain manner) or those that package loans and work with certain franchisors and/or the SBA. Many think they can find financing themselves, but during recent years that is no longer an easy task. You should certainly speak to your bank; but be aware that you may be better served to work with a company that specializes in helping franchisees get financing as they are familiar with the industry financing standards. They know which banks have available funds to lend as all banks try to balance their portfolios. They know which franchisors have a history with certain banks and that can make funding easier. Begin to speak with your bank, credit union or finance brokers early in the process so you can determine the best program for your situation but do not give them authorization to pull your credit or begin the process until you have settled on a specific business to purchase. You can pull your own credit report and will want to do so. These companies can advise you how to do so without lowering your credit score. If the companies initially pull your score for you, it might lower your credit rating which is the reason you only want to limit the number of companies pulling your credit report. However, all will need access to your credit report to provide you a quote of their services and be able to quote you interest and help you determine your financing options. Other sources of financing information include the franchisor, your financial adviser, the IFA (International Franchise Association), and sometimes a book or magazine on how to finance businesses. Your eAdvantage4u can also suggest resources to you.
The net worth requirements of each franchise can vary greatly. Most good franchise companies will have net worth requirements. They will usually range from $25 thousand dollars net worth for less expensive, home-based franchise to a few hundred thousand dollars for a more expensive brick and mortar type franchise. Hotels, build-to-suit restaurants, and area/master and multi-unit franchises are available but may cost even more. Some also have liquidity requirements, that is, the companies want to know that you have liquid funds or access to a certain amount of cash to cover the upfront franchise fees and then they can help you obtain financing as part of their franchise services.
That is a question only you can answer, but if you are buying a business for passion, it can get old rather quickly if you are not making any profits and lose your business. Everyone would love to own a business which enables you to feel passion and also yield great profits, but generally if it is something everyone loves doing, too many people are involved in the business segment; and therefore, the profit margins may be low and thus little money can be made. The title of one recent article was, “Do what you love and starve.” Too many times it can be true. Warren Buffett once said that he looks for “dull” companies to invest in. Why is that? Because more times than not, the dull companies are the ones for every day needed services and thus the dull companies often offer the best profit potential. Many people find you can develop a passion for almost any business if you are making a great income and are providing a good product or service to your customers. If you can afford a business where you make little profit and want a tax right off, then consider a business based only upon your passion where you enjoy every moment because it is your passion. Otherwise, with the help of your eAdvantage4u consultant, you can find a business that leverages your talents, where you have some interest, and find one that can help you reach your goals, including your financial goals but gives you the freedom and flexibility to truly enjoy your passions as a hobby as you rejuvenate away from your work!
With over 3500 franchisors in the market place, there are some great ones and some real clunkers. One of the best ways to find sound companies where there is great opportunity is to work with an eAdvantage4u consultant. All are experienced franchise professionals and have been award the certified franchise executive (designation by the International Franchise Association for those who have passed the highest level of certification) or work in conjunction with one that has obtained such designation. eAdvantage4u consultants know and understand the various business models and companies in the different industry segments in the franchise marketplace. Your eAdvantage4u consultant works directly with you and, as appropriate, other consultants also help you as they work collaboratively. The franchisor will charge you the same whether you use an adviser, coach, consultant or broker or not. If an adviser, broker, consultant or coach is charging you for their services, go elsewhere, for this should be a free service to you so you can obtain professional guidance early in the process as well as throughout the due diligence process. And remember, not all advisers, brokers, consultants or business coaches are the same either. You should check their credentials, experience and expertise. Visit our "About Us" page to check out our background and experience and also visit the "Accolades" page to see what others are saying about eAdvantage4u's services.
First look at the consultant’s background and see if they have any franchise background and experience. Most will be listed on a web site or you can locate them through Linked in or by Googling their name. Have they ever owned a franchise or business? If they have, it is a big plus. Have they have ever been instrumental in starting a franchise company? If they have, it is another big plus. What is their education, work history and experiences? Do they have experience in franchising industry or have they come from another industry? Do they have any professional designations such as Certified Franchise Executive? Why settle for less than the best?
If your advisor, broker, consultant or coach is financially secure, your consultant will be more interested in helping you determine what is right for you and your situation. Why would a candidate take advice from someone who has never owned a franchise or business? Why would you take advice from someone who is only working just to make a referral fee? Find a consultant who is willing to teach you how to investigate any franchise concept and who is willing to be a mentor to you throughout the entire process. You should want more from a consultant than one who just will present you a few companies and then never give you any good advice or provide valuable resource materials to you. With eAdvantage4u, you can count on its 3-point promise: Value, Choice, and Results!
A good franchise attorney or small business accountant can be a very good asset to your team when you are ready to sign your franchise agreements. But you need to really understand the ins and out of your business and the terms of the agreements yourself, including the financial aspects, because as a small business owner can’t afford to call his/her attorney or accountant for every question. Your eAdvantage4u consultant will share the eAdvantage4u SMART eDiscovery™ Process to help you with your due diligence. The franchisor will answer your questions. The franchisees will verify their experiences about various issues and answer your questions. They will tell you how much they made. Then, after you have completed your initial pro forma and then made adjustments as you learned more and factored in aspects that are specfic to your area, you might want to confer with your professional team.
It is important that the professionals know and understand franchising so they can give you good advice. An attorney with no franchise experience will usually be willing to learn on your dime. This can be very expensive for you. A good franchise attorney, in a few minutes, can explain the good or bad in a FDD document and answer your questions, where a non-franchise attorney can take hours to research and then express an opinion.
Most small business good accountants can help you tweak your pro forma for most any franchise company. A pro forma is a spreadsheet which lists the initial costs, the ongoing expenses, projected sales revenues, etc. so you can calculate the estimated net operating income, forecast your projected net profit and project your return on investment. It is important to know when and how long it will take you to make money with the franchise business so you have appropriate working capital and money to cover your personal expenses during the start up phase of your business. A good accountant should also be able to evaluate and explain the financial statements of the franchisor which are an exhibit in the FDD. Your accountant might also develop a list of any questions you should also ask the franchisor. In addition, a good accountant can help you understand the type of business entity you want to establish when you purchase your business that will provide you your greatest tax/financial benefit.
This is a question that cannot be answered by the franchisor, consultant, coach or any adviser.
If the franchisor provides financial representations, this information will be included in Item 19 of the FDD if the franchisor has provided detailed information but even if such representations are provided, you will still need to speak to the franchisees of the franchisor. Most franchisors do not provide such representations in Item 19. All will provide an investment range, and list cost and expense within the FDD. You will have to speak to the franchise owners of the companies you are investigating and develop your own financial pro forma to make that determination based upon your research.
Please remember that most franchisors have a set discovery and sales process and don’t want to waste their franchisees' time speaking to people who are not qualified or with whom they have no interest in awarding a franchise. Therefore, many franchisees will not speak openly to divulge financial information unless the franchisor gives you a pass code to use. Also, the franchisors use a pass code system because they don’t want the competition learning such detailed information about their systems.
To help you as you call other owners, often referred to as "validation", ask the franchisor, franchisees or your accountant if they are able to email you a blank pro forma spread sheet for you to use when you talk with the franchise owners. eAdvantage4u has a generic spread sheet for your use if you are not able to obtain one from the franchisor or franchisees of the system so you can begin to fill in the blanks and learn about the financial aspects of the business. (The sample spreadsheet / pro forma can be found under the page labeled "Franchise Info and Tools.") You can build a good pro forma financial projections but it takes diligence, time and perseverance.
Remember, franchisees are working their businesses and often not readily available to speak. Thus, you will want to set appointments with them in advance. It is important to know at what point do most franchisees' hit their break-even and what kind of income can you make, and what kind of equity potential does the business offer. For some concepts, you may need to purchase more territory or open additional units to reach the income and equity you desire. You should get a good idea about what type of income you could earn after talking with many franchisees of the company you are investigating. You will also want to understand the type of equity potential you can build because at some point you will want to exit your business. Through your conversations with the franchisor, your review of the FDD, and your validation calls with franchisees, you have accumulated facts to develop a pro form and now be able to evaluate your risk/rewards and determine if the business can help you reach your goals.
Most franchise companies are designed where the buyers can have little or no industry specific experience and still be very successful if they take part in the training and support and follow the franchisor’s systems. Keep in mind you cannot put a round stick in a square hole. In other words, if the franchise company requires an outgoing, aggressive personality to be successful, and that is not you, you should look for a different franchise to buy. Some of the franchise systems will ask that you take some kind of profile test to help you and them determine the potential fit. There are no right or wrong answers to such tests but some businesses need more of an outgoing, driven person to achieve results than others and they want to know how you stack up compared to those very successful in their systems.
More and more franchisors have excellent marketing and sales programs where the owner's role is one of implementing the marketing and advertising strategies that the franchisor has tested and which has proven to be effective. Sometimes it is traditional or social media advertising that drives customers to your business. Sometimes it is other methods that are more relationship driven where the owner's role is to answer questions and provide estimates to make sales. Sometimes, it is access to call center services that line up and book appointments. And today, more and more appointments and inquiries come online to the franchisor's web site that are passed on to its franchisees. Thus, there are many sales techniques and systems that are utilized to market and advertise to customers and very little true "cold calling". Only buy a business where you feel comfortable with the corporate culture and the franchisor's marketing, advertising and sales strategies. Find one that you feel can match your personality. Do not buy a franchise if you cannot follow a proven system and want to do business your way without any systems.
Some franchise companies are set up to work very well with an “absentee or semi‑absentee” type owner while others are not. Most franchise companies require a full-time, hands-on owner (at least in the beginning) and the business cannot be run very well with a part-time owner. The franchisor will tell you what time commitment is required for you as the owner. It is very important to verify time commitments by talking with franchisees of the company, especially the newer ones, as your experience should be more like theirs. Remember there are some who always exaggerate so ask some questions besides just how many hours you are working. Some feel they are working just because they are at their computer and they may have been checking weather, the stocks, and their kid’s schedules for ball games.
Generally, it is more expensive to buy an existing franchise and you pay a premium for the cash flow. Building it from the ground up will cost less generally, and you will earn more equity. Which is best? It depends on your financial position and your goals.
Many times a business can sell for 2 to 4 times the net income of a business, plus assets. Sometimes, depending on how long the business has been open, it can sell for many more times the net. If a business has been losing money it can be bought below the cost or asset value. It is sometimes called a “fire sale” but could be a great opportunity provided that the location and territory is viable and the reason is the owner not working the business or following the systems. Buying one of these can be a good deal or a bad deal. If it is just being poorly managed and you feel you can turn it around by good management that you bring to the table, it could be a good deal. Sometimes it is a bad location or some other factor that can or cannot be changed. Sometimes buying an existing franchise business can be good, other times it can be bad. Many times buying a new franchise can be the better deal. Look at your options and see what is best for your circumstances. Speak to your eAdvantage4u consultant. And you may also want to get your attorney and accountant involved.
Under most circumstances you should be able to sell your franchise but the longer you have owned and the higher the net income of the business, the easier it will be to sell. If you sell within the first year of purchase, you will probably lose money. Likewise, if you sell after 10 years and are making a large income, you will be able to get more money for the business. Many business brokers will tell you a business will sell 2 to 4 times the net income, plus assets. Usually, the longer you own and the higher the income, the greater the multiple you can get. It is usually best to get a business broker, the franchisor, your attorney and accountant involved. Always check your Franchise Agreement and understand the requirements.
Thus, before you purchase your business, you need to understand how this business can help you reach your goals. And with all investments, it is always good to plan an exit strategy so you understand what you need to do to build your equity so you can maximize your investment when you decide to sell at some point in the future because you want to retire or want to move to a different location or leave the business for a variety of other reasons.
Some franchise businesses can be open within a month or two after signing your franchise agreements, while others could take many months or years to open. Home-based, office or warehouse type franchises can be opened much quicker than a build out “brick and mortar” type franchise. Normally the franchisor can give you the average times to train and launch your business. You will also want to validate the time line with franchisees of the franchise business.
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