Starting a business on your own can seem overwhelming. An alternative has always been a franchise investment. You pay a fee and in return receive a turnkey operation. It sounds so simple and risk-free. The truth is that whether you choose to go on your own or buy a franchise, there are risks to be addressed.
The big question: Can you make money?
While a big reason you are starting, buying or becoming a franchise business may be the opportunity and challenge to work for yourself, this is your new job and you want to be paid. A vital question is whether the company can generate profits and cash. This is where a business plan becomes a useful tool in determining how much cash you need to invest up-front and when you expect to see cash returns.
There are two parts to the cash question:
First, what do you need to spend before opening the business? This may include office or warehouse space; security deposits; furniture and equipment; legal and accounting fees; licenses, and maybe some initial salaries. This is the initial capital requirement and is funded from personal resources and borrowed money.
Secondly, how much will you make once you "open the doors"? To figure this out, you will need to create a forecasted income statement. This will show how much revenue should be generated, what expenses you will incur and the cash that is left over. The franchisor may be able to help with this and show you a "typical" operation. Without the franchisor, you will need to do more research.
A projection for a new business is always the sum of many assumptions. A critical eye is important. Can you really generate revenues quickly or will it take time to build the business? Do you have all the expenses accounted for? Perspective is important here as well: too positive, and you think you are printing money; too negative, and you decide to scrap the idea. The right answer may show a modest profit, but the need to closely watch expenses.
Some advice about franchise fees
The franchisor typically charges a buy-in (franchise) fee and then ongoing (royalty and marketing) fees based upon revenues. The franchise fee is for the start-up advice and the privilege of being a part of their operation. This fee is separate from the other start-up costs you will incur. This is a part of the initial investment. This money comes from the owner(s). It may be funded by savings, friends and family, or a bank loan.
The royalty and marketing fees typically range from 6% to 12%. These fees are charged regardless of the monthly revenues. You will pay these monthly fees in good months and in bad. Often they are paid weekly by a draw from your company bank account. This is money for the franchisor and an expense to the franchise.
Assuming a 10% fee, this can be expensive and difficult if you are not achieving targeted revenues. My suggestion is to negotiate a floor on these fees so if revenues drop to the level where you are forecasting a loss, franchise and marketing fees are not due.
As for marketing fees, be aware of the franchise marketing plan. If it is a large and established franchise, there will be many locations paying into the marketing fund. A small or newer franchisor may not have the same level of marketing dollars. More dollars may equal more marketing benefit for the individual franchise.
o Understand the investment needed to get your business started.
o At a minimum, forecast revenue, expenses and cash profits.
o Be sure you understand your ongoing obligation to pay franchise fees and the benefit you expect to receive from the franchisor.
Starting a new business is always the beginning of a great adventure. The initial planning will help to defray the inevitable surprises you will find along the way.