When researching franchises for sale, the first question most franchise candidates ask is “how much does it cost?” The answer is almost always “more than you think.” New franchisees often get in trouble because they don’t have enough money to get through the start-up phase and the first 6 to 12 months of operating. We call this “undercapitalization.”
“Undercapitalization” is a big word that means “not enough money is put into the business.” This is one of the main reasons that business start-ups and new franchisees fail. You need to have adequate funds to get started and keep the business going through the first year.
How do you know how much you need? Most franchisors spell out all the initial expenses in Item 7 of the Franchise Disclosure Document (FDD). Ask the franchisor’s representative for their FDD. Item 7 usually includes, but is not limited to these items:
- Franchise fee
- Expenses during training
- Lease (deposit and monthly costs)
- Build-out of location
- Furniture, fixtures, equipment and supplies
- Utility deposits
- Business licenses and insurance
- Training costs
- Grand Opening and other marketing expenses
The FDD provides a minimum and maximum investment range. Build your funding plan around the maximum investment to give yourself a financial cushion. If you want a viable business, add ongoing expenses into the calculation, including rent, employee costs and marketing costs.
Those are just the business expenses. In addition to feeding the business’ financial need, you need to have enough money to keep your household running. You can’t live on passion alone, so calculate your living expenses too.
When buying a franchise for sale, we recommend having at least one year of living expenses in reserve. It can take up to that long before the owner can take a salary from the business. Use a budget worksheet, or online budget calculator to help you determine the amount you’ll need for living expenses.
Make sure the math works. You can work hard and follow your passion, but if the math doesn’t work, neither does the business.
Also check out StartupNation’s Franchising Success Workbook for more ideas on how to win as a franchisee.