Financing Your Franchise

Financing Your FranchiseNow that you've decided you want to own a particular type of franchise opportunity, you've made a major step toward your financial independence. But now comes the hard part - figuring out what such an opportunity will cost and what you can afford.

How much of your own money can you afford to invest?

Start by analyzing your net worth. Make a list of your assets and liabilities. Subtract your liabilities from your assets. The resulting number is your net worth. Based on your net worth, ask your financial advisor how much you can personally afford in terms of the purchase price and the down payment of a start-up franchise. A consultant with the U.S. Small Business Administration recommends investing no more than 15% of your own money in your down payment. Keep in mind that what you can afford is not just a financial decision. You must also decide what you can personally tolerate in terms of risks and rewards to be able to still sleep at night. That same expert gives the following example: Let's say your net worth is $400,000, and your liquid assets are $80,000. 15% of your net worth is $60,000, which would be the recommended amount to invest as your down payment. Of course, you will have to borrow the rest from a bank like you do with a home mortgage. Since most lenders want a 20-25% down payment on a franchise purchase, your $60,000, which is 25% of $240,000, would enable you to buy a franchise priced at no more than $240,000. But remember your $80,000 in liquid assets? When you use $60,000 for your franchise down payment, you have $20,000 left over as a cushion. Only you will know if that's enough. If you have already decided which kind of franchise you want to purchase, such as a fast food franchise or a coffee franchise, you can explore your franchise opportunities by size of investment. You will be amazed how many opportunities ? including consumer favorites like Hardee's and Carvel, and business leaders like Money Mailer and Batteries Plus Bulbs ? will fall into your range.

What does a franchise cost?

The best way to know the absolute cost of a franchise is through the UFOC (Uniform Franchise Offering Circular), which the franchisor is legally required to give you before you purchase a franchise. This document gives you everything you need to know about a particular franchise, including all the fees and costs involved in owning one. In general, the cost to start a franchise consists of several different factors:
  • Your one-time franchise fee: This can run the gamut from $10,000 for a small home-based or mobile business to more than $5 million including the land for some hotels.
  • Set-up: This varies according to the type of business you're buying. It can include anything from purchasing real estate to building out your store or office, inventory, equipment, insurance, employee training, business licenses, rent, landscaping, signage, advertising and promotional events. Note that many franchisors cover some or all of these expenses with your franchise fee.
  • Professional fees: You will need to pay your attorney and your accountant to help you get started.
  • Royalty fees: These are your ongoing fees based on either a set monthly amount or a percentage of your gross revenue.
The majority of franchises start around $50,000-75,000 to get started, though you can invest up to $5 million in some of the biggest brands.

Generally speaking, expect to pay over $60,000 for a proven franchise brand.

What are your financing options?

You have three main options for financing your franchise purchase:
  • Friends and family: While this route may ultimately be personally too complicated for most people, it's worth a look, especially if your friends and family are of an entrepreneurial spirit. Of course, you need an attorney experienced with such set-ups to guide you through.
  • A bank or credit union: According to SBA data, most franchise start-
    ups are financed by a commercial bank loan.
  • An SBA (Small Business Administration) loan: If you can't get a commercial bank loan with reasonable terms because your financial situation.

doesn't meet the banks' desired profile, consider an SBA loan. This program operates through private lenders who provide business loans that are guaranteed by the SBA.

How to get a bank loan.

When you meet with your loan officer, be sure to take with you the following:
  • Proof of your credit rating.
  • Copies of your last three tax returns.
  • Information about the sources of your down payment funds.

Be aware that banks look more favorably on loans for franchises with strong brand names and a proven record of consistent profitability, cash flow and performance across diverse locations.

How to get a Small Business Administration loan.

Commercial banks, now more than ever, are more favorable to business loans to larger businesses with more assets and collateral, a larger cash flow and a proven credit history. Small businesses, especially start-ups, lacking such a profile, are less likely to get the same advantageous terms. That's where the SBA comes in. Since 1953, it has helped guarantee millions of loans to small- and mid-sized businesses. To qualify for an SBA loan, you must meet the following criteria:
  • Be turned down for private financing.
  • Meet the SBA's size requirements, usually less than 500 workers.
  • Meet the criteria for your particular type of loan.
  • Meet the qualifications of an SBA-participating bank or credit union.

You can find the specific requirements on the U.S. Small Business Administration website.

What's next?

Once you know what you can afford, start exploring your options. Take your time, make a rational decision, and you will soon be the owner of your own business.