3 Financial Questions to Ask Before You Buy a Franchise

| In Franchising 101 |

Teacher presenting investment strategy to become a successful business

When you are exploring franchise opportunities, it’s important to know you have the right to ask questions. After all, it is your money and your career. David Lewis, vice president of franchising for Express Employment Professionals, has some advice on the key questions to ask, and what to do if you don’t always get the answers you need.

  1. How Much Money Do You Really Need To Be a Successful Franchisee?

“There is more to this than the cost of the franchise fee,” David said. “It’s not just the cost of the franchise fee versus how much money you have available to invest.”

David says it is important to look first at your own situation. “How much can you live on while you are getting the business started?” he asks. “If you won’t be able to draw a salary from the business for a year or two, you will need to consider that as part of the larger math equation.”

“Next, analyze the equity you have versus the debt,” he adds. “If you are going to need an additional $100,000 in cash or a $300,000 loan on top of that until your franchise becomes profitable, are you equipped to service the debt payments?”

  1. How Much Will Your Business Pay You?

“For prospective U.S. franchisees, the first place to look for this information is in the Franchise Disclosure Document,” David said. “This disclosure is required by the Federal Trade Commission. It contains 23 specific items of information about the franchise, its officers, and other important information. Think of it as similar to a prospectus you would read if you were considering buying a certain stock.”

“Be sure to check whether the franchisor has an item 19,” David says. “This item is optional, so not every franchise will offer it. Franchises that show item 19 disclose a valuable financial performance representation of their business.” For example, The Express item 19 discloses that the mature Express office averages $6.2 million in sales each year. That’s powerful knowledge to know in advance of starting a business.

“If the franchisor does not share item 19, you are essentially being asked to buy into the franchise cold,” he said. “But there is one other source to seek out financial information: the existing network of franchisees. Some franchisees are willing to discuss their financial returns, but not all.”

  1. What Does the Franchisee Investment Really Cover?

Every franchisor is required to tell you how much of an investment you must make, but it’s often not clear how far that investment will take your business.

“For example, a well-known brand may tell you that you need a million dollars to open a franchise of their fast food restaurant. Many people assume that means they need to spend a million dollars to break even, but that is NOT what it means,” David notes. “If it actually takes you two years to break even, you will wind up spending a great deal more than that initial one million dollars.”

David suggests that you continue to ask questions until you are sure you understand the true cost. Ask, is this what I need to get the doors open? What does it cost to run for the first year? At what point can I expect to break even?

For more information on Express Employment Professionals and the fast-growing staffing industry, visit ExpressFranchising.com.

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