Calculating Your Initial Franchise Investment
So, you’ve settled on a franchise opportunity that is a great fit for you. Now, your next step is to calculate how much startup capital you will need. Your initial franchise investment is a critical factor, and you must be sure to calculate it correctly. The one largest cause for new business failures is running out of funds before the venture generates a profit.
This is a harsh reality that many entrepreneurs fail to realize. You must have sufficient capital to get everything ready to open the business, and then enough to keep it running until it becomes self-supporting. Becoming part of an existing franchise provides you with two very important resources from which to draw when making your franchise investment calculations.
- The Franchise Disclosure Document– Every franchisor is required to prepare and deliver to prospective franchisees a copy of their Franchise Disclosure Document. Out of the 23 specified items of disclosure within the FDD, item number seven is an estimate of the initial investment each franchisee will require, including the working capital they will need during the early months of operation. A franchise operation that has been in existence for some time should have a fairly accurate estimate.
- Existing Franchisees– Existing franchisees within the franchise system can provide real-world records of what was required when they began operating. An estimate is helpful; an actual record of costs provides greater accuracy, as well as a list of the actual cost items. This can reveal some items that you had not considered, and prevent being blindsided later.
Preparing the Location
Most franchises will require a physical location from which to operate. In fact, many franchises specify the size, layout, and design of the building you are to prepare. This can save you time, with existing blueprints from the parent company that can be adapted to your location. But there are initial franchise investment items to consider when preparing your franchise location.
Your parent company may provide these services. But if not, you must pay for market research to ascertain the best possible location for your franchise, among those properties that are available. This will include a real estate agent’s commission, as well as the costs of demographic studies, traffic studies, and the area competition.
If you rent the land, the landlord will demand a security deposit. If you purchase, there will be an initial loan down payment. And the utility companies with which you will do business will be first in line for a security deposit, as you will likely begin using their services as you erect a building.
Building or even remodeling an existing location will demand the services of an architect, various engineers, and of course, an attorney. All these professional services will have their own costs.
This can cover everything from actual dirt work, to installing sewer, water, and gas lines, to building a foundation and construction of the actual building. Don’t forget signage, equipment, furniture, décor, landscaping, paving, and the costs to ship everything to the site.
Preparing for Business
After your location is ready to be occupied, there are still needs/costs to prepare everything for the arrival of your first customer.
Opening Inventory and Supplies
A beginning stock of franchise products, the necessary items to prepare them, paper supplies, cleaning supplies, and everything you will need to prepare your products or services for delivery to customers. And for cleaning up after them, after closing.
Point of Sale & Computer Needs
Today’s businesses operate in the digital realm. And there is management software available for any business need. Your parent company will likely have a system they require you to use, for continuity across the franchise system, but you will likely be responsible for purchasing it.
Property and casualty insurance, worker’s compensation and, if you have a vehicle, automobile insurance as well. In most cases, all or part of the first year’s premium is due as an advance deposit to begin coverage.
Labor costs don’t start the day you open for business. Your employees and managers must be trained and will work to set up the business before you open. All the time they are working and training, they must be paid.
This is money to pay for the bills and expenses you will incur before your business begins turning a profit. This can range from a few weeks to two or three years, depending on your business. You may generate some profit, but you need enough put back to cover expenses until your business is completely self-supporting and generating a profit over and above costs.
Perform Your Due Diligence
The best rule of thumb when calculating an initial franchise investmentis to hope for the best, but plan for the worst. There will always be factors in your situation that differ from initial estimates or other franchisee examples. The reality of your actual market will dictate how costs bear out. Be sure to research extensively and plan carefully, with a reserve built into your estimates.
Need help researching franchise opportunities? Franchise Guardian advisors can help you with every stage of research and planning. Call or contact us online today.