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5 Financial Things You Must Know About Franchising

Finances are important for any kind of business–and franchising is no different. But, in the beginning, it’s quite difficult to predict how much money you will need. Many times, when setting up a business, you will find that you have run out of money! So, here are five financial things regarding the franchise business that you should know when you are in the market to buy a franchise:

1. Initial Investment: Both the UFOC and the franchise agreement will mention the initial cost of starting a franchise business. It will include the franchise fee, the real-estate price, the cost to buy or lease equipments and the cost to renovate or build the new location. You can add to it the cost of paying a franchise attorney or a franchise consultant, if you have hired one. These costs won’t be mentioned by the franchisor, but you need to include them when you form a business plan.

2. Getting the money: There are various ways of obtaining finance in order to start a franchise business. You can dip into your savings, borrow from your friends and relatives or go to the traditional bankers. If you have chosen a small business franchise or if your franchisor has been pre-approved by SBA, getting SBA loans won’t be difficult. Unconventional method of acquiring finance includes getting loans from credit cards or using the 401k retirement plan.

3. Running cost: Don’t think that your financial trouble is over after the initial investment. Another major cost you are supposed to keep in mind when you are starting a franchise is the running cost of the business. You cannot start profiting from day one and until you do that, you have to use your working capital to fund your business. Even if your business doesn’t involve any inventory, there will be the cost of maintaining an office, paying utility bills and giving wages, if you have employees. Sometimes, it is the running cost that causes financial problems in the business, so calculate your working capital properly when you buy a franchise.

4. Franchisor’s fees: How much you are earning from your franchise business will depend on the amount you are required to give to the franchisor in lieu of different fees. Besides the franchise fee, which is a one-time fee, there will be other fees mentioned in the franchise agreement. The one that directly relates to your profit is the royalty fee. If it is the gross sales of the business, then you will find that you have little left in your hand after paying the franchisor. Similarly, there will be the advertisement fees, which are, however, paid on a yearly basis as opposed to royalty fees, which are given either once in a month or once in 3 months.

5. Financial success: Your financial success as a franchisee depends on various things. The fees that you pay to the franchisor is a big criterion. If you have borrowed the major part of your investment, then repaying the debts will further eat into the profit. On the other hand, if you have gone for a low cost franchise, the ROI can be a comparatively short period of time. Then again, the amount of profit may not be that much. For investments that need huge working capital, the ROI may be longer, but the business may be more profitable in the long run.