Owning a franchise is a great way to start a successful business, but the costs of starting one aren’t always cut and dry. While every franchise opportunity has initial fees listed, there are several other factors you need to consider when calculating how much capital you’ll need. The four points below will help you to calculate how much capital you have available and how much you can spend on initial franchise costs.
Evaluate Your Finances
This is obviously the first place to start. You need to consider your capital in totality. Most people only consider how much they have to invest personally and what kind of financing options they have. These are certainly the two most important financial factors, but you should consider other options including the following:
- Can anyone else invest in the business?
- Can you raise more capital?
- Could you qualify for any grants?
Once you figure out exactly how much capital you have available, you can move to the next step. You should also leave a little bit of investment money in your account should any emergency needs arise at the last minute.
Thoroughly Review the Franchise Disclosure Document
The Franchise Disclosure Document, also known as the FDD, is a legal document that a franchisor is required to provide to a potential franchisee. This document has a lot of important information, but the most relevant information to this inquiry is the estimated start-up costs.
Estimated start-up costs include things like franchise fees, deposits, initial inventory costs, costs of signage, supplies, rents, and other such expenses. You need to take all of these costs into account as you’re setting your budget.
Evaluate Ongoing Costs
Initial costs aren’t the only thing you need to be concerned about. It could be years before your business turns a profit, so you’ll need to be able to cover ongoing costs. This includes wages, taxes, supplies, advertising, and more. A good rule of thumb is to divide your assets by your liabilities and have 1.5 to 2 times that amount in working capital.
Consider Your Market
Your market will have a direct impact on how much money your franchise will make. Naturally, you’re not going to open your business in a place where you don’t think it won’t succeed, however, your market can determine how fast your numbers get into the black. For example, if you open a franchise in a beach destination that sees record numbers of tourists in the summer and little to none in winter, you’ll need to consider that there will be one to two seasons in the year where you aren’t pulling in revenue. You need to strongly consider this when deciding how much money you’ll need to make it through dry periods.
Once you’ve considered the points above, you will have a better understanding of which franchise opportunities you can afford for the long term. Remember that it’s not only about initial costs. It’s about making sure you can cover any financial obligations along the way so you won’t run out of money before you start making any.
