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The Actual ‘Money’ Questions

A franchise operation, with rare exception, is a for-profit endeavor providing goods and services at fair market value.  

It takes money to make money, however, so before committing it’s important to ask and answer the following money questions to ensure that the ledger balances to your satisfaction:

How much money can I make with this franchise?

It all starts with this fundamental question.  The truth of the matter is no one can predict this. It depends on a lot of factors – location, the marketing that you choose to do or participate in, your level of engagement, the performance of the team that you assemble and more. Within the franchisor’s Franchise Disclosure Document (FDD) you may find a range of incomes (it’s not mandatory) but even if it is there, it’s often presented as a broad range of and as a consequence, of limited utility. The best way to find this information is to talk to existing franchisees. Remember that it takes time to build that revenue stream and that other factors will influence the profitability of your franchise, but it’s a strong indicator to inform your thinking.

What is the total investment required for this franchise?

Knowing what your upfront costs will be for buying and running the business until it makes a profit is a key piece of information. Again, you will be able to learn about these costs in a general manner in the Estimated Investment section of the FDD. For more specific and accurate information, those current franchisees remain your best resource and even then, those figures will be a well-informed estimate but still only an estimate. Be sure to plan for sufficient working capital in addition to your upfront costs.

What will I need in working capital as my business begins?

Working capital is the capital that you’ll have to put into your business post start-up and before incoming revenues exceed your expenses. This includes both operating expenses (such as your lease, cost of employees, utilities, etc.) and your personal living expenses. Since the break-even point could take longer than projected and your expenses may skew higher than expected, an extra cushion of capital is a smart idea.

How long will it take before I reach the break-even point with my new franchise?

Few businesses make money during the start-up phase. Building up your customers takes time and the franchisor will have the data on the range of time in which most of their franchisees reach the break-even point. Plan conservatively using the longer end of that range.

How strong is the franchisor financially?

Your financials aren’t the only thing to scrutinize here, you also need to closely examine those of the franchisor during this evaluation process. A franchise company that is in a strong financial position will be able to support the franchisees, persevere through challenges and be able to build the brand and adjust strategy as needed. If you’re not an accountant by trade, consider enlisting the assistance of a financial adviser with interpreting the information in the FDD and other public filings from the franchisor.

Getting answers to these money questions is a critical step. Take time with each and every question and talk to as many people as necessary so that you are confident in the accuracy of the answers. With the answers to these questions, you can confidently make proceed to determining your preferred means to secure the required capital.

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