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8 Money Questions: Will my New Franchise be Profitable?
Will my employees be adequately trained to take on the job? Will inventory be calculated right? Better yet, how much money will I make? Before pursuing any business ventures, thoughts of profit building automatically come to mind. Here are the top 8 questions for everything involving money through owning a franchise.
- How big of an investment do I have to put down for this franchise?
Good question. Look to your Uniform Franchising Offering Circular document (a legal document that all franchisers must disclosed to franchisees) to see detailed information on fees, expenses, litigation history, financial arrangements and more. Place calls to franchisees and ask them about the local market. Come up with a pinpoint answer if you can; otherwise, assume that any financial investment will be high.
- How much operating capital reserves do I need to cover losses after starting a franchise until I reach a breakeven cash flow point?
Keep the questions coming. Keep in mind, profits won’t come rolling in the first day. Expenses will dominate any profits for the most part. Revenue must grow steadily until it is enough to handle these expenses. For the time being, more cash should be funneled into the business to cover bills. Adding too many funds to your financial reserves is never a good thing, as you might need to tap into it frequently.
- I’ll have plenty of living expenses. When I launch my franchise, how much extra money do I need?
Between the time it takes to start operations and making profit to cover living expenses, many franchises struggle initially. There is where planning your budget is important. Know how much money you’ll need monthly and make sure you have enough cash to cover it during this time. Piling an additional reserve to this is strongly recommended. Remember to add your business investment on top of your living expenses budget as well.
- Will it take a long time for my brand new franchise to break even?
Funneling extra funds into your franchise to help offset operating losses is not a good time, but it’s a necessary evil. In every franchise, there is a defined period in which you’ll reach this point. Think ahead and assume it’ll take you the entire period to reach breakeven to stay on the safe side. Always assume the worst.
- Should all of my total investment be in cash?
It depends on the franchise business you’re interested in. It can be 2%, or even 98%. Based on the information each franchise gives you; make sure you have that cash total on you.
- Are there lots of financial options available?
Bank loans and commercial leases are major players in financing. The preferred bank loan for franchising is a secured one that’s covered by collateral, home equity, or an SBA guarantee program. Many franchisees would agree that your best bet is securing an open line of credit against home equity. Nevertheless, leases are also a viable option – as procurement comes quickly and is secured by leased assets. In addition, family and friends can provide you start-up funds. Many companies can also work with you to recoup monies from IRA and 401(k) accounts earlier without having to pay a fee.
- Show me the money! How much money will I receive?
It depends on how long the business has been up. Your first year will present you plenty of losses, but by year 3, expect the profits to start pouring in. Asking already established franchisees about what they’ve been through is always a solid bet. For starters, the end of the Year 3 is a clear indication of where your salary is headed.
- Is the franchise company making money?
Ask for all financial information the franchise company has, including audited financial statements and any UFOC document related paperwork. Make sure they have the sufficient funds to invest in training programs and support systems for their units. Review their paperwork yourself and ask an accountant to help you should you need it.
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