One of the most common questions I get is, How much can I afford to invest? That’s a difficult question, as the answer depends on several factors. Let’s break it down. When considering an investment in a franchise, there are three critical components to be aware of.
What It Takes to Get Your Franchise Open
The first one is the initial investment. This is what the franchisor is required by franchise law to disclose to you regarding the costs associated with getting the business opened. It includes items such as the franchise fee, build-out of the location, inventory, and the initial setup costs. There are numerous costs involved, and the amounts depend on the type of franchise. It could be as little as $50,000, or it could be into the hundreds of thousands, or even millions of dollars.
The Path to Break-Even
The next critical component is the business working capital. The business working capital is the amount you need to continually inject into the business from Day One until it achieves break-even. Break-even means you have enough revenue from your customers to cover your operating expenses.
Franchisors will often provide you with an amount for the first three months of working capital, e.e.; $25,000. Don’t think that $25,000 (or whatever that number is) is all the working capital that you need. What you want to do is learn from talking with several existing franchisees – how long did it take them to get to break even? The time to break-even can be longer than 9-12 months for many businesses, so it’s likely going to be a much bigger number than what the franchisor says is required for the first three months!
Let’s say it’s 75,000, so it’s $300,000 to open it and $75,000 of working capital. You think, “Okay, I’ll put in 30% and the bank will finance the rest. I have $100,000 (of my own money), so I’m in”. Well, guess what? You’ve missed a critical component, and this is where most people get into trouble.
Personal Working Capital
This is what I refer to as personal working capital.
The reality is, most businesses are going to take you 6-9-12 months before you can start drawing money from it. If you’re the principal breadwinner of the family or you’re contributing to the monthly household, you’re likely not going to be able to draw that from the business (during start-up). So, for however many months you’re going to be running the business (before break-even), you need to include that cumulative amount as part of the initial investment. If your share of the household expenses is $4,000/month of after-tax income, and it’s going to take you 9 months to get to break-even, then 9 months x $4,000 = $36,000 of additional investment you have to factor in.
The total of all three components (initial investment, working capital, and personal working capital) will determine your investment comfort zone and level, and I’ll help you determine that. I look forward to having a discussion with you about it. Book a call and let’s talk.
