So you've done your research and narrowed down the field to several franchises you'd be interested in operating. But before you buy a franchise - or any business for that matter - you should have a realistic projection of sales, expenses, and profits and whether or not they match your financial capability. An investment can go for as little as $10,000 for maintenance franchises to as high as several million dollars for a hotel.
1. Determining My Financial Capability
In order to measure the viability of the franchise investment you are interested in, you need to determine the following:
- Net Worth (total assets minus total liabilities). Examined by franchisors with minimum net worth requirements; also provides an indication of your ability to finance your investment.
- Liquid Capital. Assets easily converted into cash.
- Other Personal Financial Obligations. Debt that must be paid regardless of how well or how poorly your franchise performs.
The Minority Business Development Agency (MBDA) provides the following worksheet for you. It is available in a downloadable PDF format here.
2. So How Much Should I Invest?
Don't invest everything in a franchise.
When calculating your financial capability, you should always remain conservative, and when you finally come up with your net worth, do not be foolish enough to spend it all. Expect initial investment fees to exceed estimates, and sales and profits projections to disappoint you. In fact, many franchisees do not make money in their first year, so having enough money in reserve is vitally important.
Be wary of financing arrangements.
Finance charges and interest are real cash flow burdens. If you cannot afford to pay a substantial portion of the initial investment up front, you might want to reconsider your decision to buy the franchise. Be careful about using things that are important to you as collateral for financing, such as the roof over your head. Also think twice about asking a loved one to bear risk with you by being a co-signer or guarantor of debt.
Next: FDD Analysis