Financing A Franchise

The Arizona Republic:

Prospective business owners, particularly baby boomers, are turning to franchising in droves in hopes of a sure moneymaker. ‘They want the financial rewards of being a business owner, but they are trying to get into business with as little risk to protect their assets,’ franchise consultant Kent Craven said. A known brand, good training and a proven business plan draw prospective franchisees in, but, sometimes, the buy-in cost can exceed $200,000, making financial planning and lots of research a must.

By comparison, small businesses in general are started with an average of $10,000, according to a recent Wells Fargo/Gallup survey. So franchising can be a bit of a sticker shock. ‘A lot of (prospects) don’t really realize how much money it takes,’ said Stephen Schwanz, president of Scottsdale-based Franchise Capital Advisors…

Things to consider before investing:

• How much money do you have to invest and how much can you afford to lose? About 85 percent of franchise concepts require initial investments up to $250,000, Craven said. Many require owners to have at least a third of that investment in cash.

Remember that in addition to the franchise fee and initial investment, you will have to make ongoing royalty payments.

• Are you willing to take direction about how your business is operated? Franchises build on uniformity, so know your obligations, such as operating hours and whether you have to use certain vendors.

• Are you ready for the hours necessary to run a business? Unless you hire a manager right away, expect to be at your store or office a lot.

• Have you thoroughly researched the franchise, including financial statements, litigation history and support/training services? Employ a consultant, attorney and/or an accountant to help you make sense of the deal.

• Have you talked to other franchisees about their experiences? You’ll want to take notes and raise concerns before investing.

• Can you make it without a paycheck for the first year? In addition to your investment expenses, budget some savings to help you pay for basic living expenses.

• What costs and consequences are there if you terminate the franchise agreement?