Investing in a franchise is a life changing decision. It’s important to make sure you are asking the right questions, particularly when it comes to finances. Money-related questions are difficult for some people to ask but learning the answers to these questions may prevent you from making the wrong decision. Some of the most frequently asked questions include:
What is the total investment for the franchise?
This is a key question, since the Franchise Disclosure Document (FDD) expresses this information in terms of a very large range of possible answers. When you speak with existing franchisees and the franchisor, make sure to narrow down these answers to provide as accurate an answer as possible. If you aren’t completely sure, consider it a red flag or be sure to use the highest number.
How much of my total investment (including capital reserves) do I need to have in cash?
There is usually a big range depending on the franchise business being considered. There’s no right or wrong answer. You should just make sure you know what applies to you and that you easily have that amount of cash on hand.
What are some financing options?
The most common forms of standard financing are bank loans and/or commercial leases. Any bank loan to start a new business will probably either have to be secured by your personal collateral (such as the equity in your home) or through an SBA guarantee program. Banks may require both forms. In addition to standard sources, there’s always the standby financing source: family and friends. There are also a number of companies that help people in accessing retirement dollars in IRA or 401(k) accounts, without early withdrawal penalties, to use as a funding source for a franchise business.
How much extra cash do I need to cover living expenses while I’m starting my franchise?
This is a critical area many new franchisees fail to consider. After becoming a franchisee, there’s a gap in time before your new business begins operation and typically another gap before it starts making enough profit to cover your living expenses. You need to carefully budget your living expenses to understand how much you’ll need on a monthly basis and then make sure you’ve got sufficient cash–in addition to your business investment–to cover your expenses during this period. It is best to add a reserve on top of this amount to give you some added piece of mind.