Affordability is in the eye of the beholder! For many people a franchise is not an affordable investment because of the minimum investment amounts required. For others, a franchise investment will not only be affordable, but will allow them to diversity their portfolio.
You will need to meet minimum requirements to become a franchisee, and each franchise will have different requirements. Anyone who is concerned about market changes, wants more control over their investments, seeks freedom from the corporate life, and wants to control their finances could find a franchise an affordable option.
To discover if a franchise is an affordable investment for you, you need to consider the total amount you are willing to invest in a franchise location and ask yourself if you can afford to lose that money.
But a franchise is a safe investment, right? Not necessarily. A franchise, like any other business or investment, has risk involved. The difference between a franchise and a regular business is the support you receive from the franchisor. And they differs from a stock market investment because you have direct control over the return.
In recent years, the U.S. economy has been massively advantageous to borrowers. Rarely has it been cheaper to borrow money to buy a house or a car or to start a business. But what if you don’t want to borrow—what if you want to invest? The borrower’s advantage is often the investor’s hardship. Where are the options for a 10-15 percent—or higher—return?
Franchising is a fantastic option for investing because even if you borrow money to finance a location, you have the opportunity to earn a return higher than the initial invested amount. It has been a franchise economy lately. Franchising is truly an investment, like any other, because there is risk.
There is no single answer to this question. All franchises will have different requirements for funding levels. Once you decide on a concept, they can provide more detailed information. Most franchisors have a franchise page that will outline their estimates, which are also found in an FDD. It is important to note that funding levels are best guesses. They are developed using historical data and previous experience, it may not reflect your experience.
Most franchise funders will also tell you to not bet on the low end estimates. Expect to invest at the higher level and come in under, rather than run out of liquid capital before you open your doors.
Service franchises will start around an investment level of $75,000. Facility-based franchises will have around a $200,000 minimum investment. All of these estimates can change when the territory, number of units, build out requirements, and equipment needs are considered.
Every franchise has its own set of requirements that a franchise candidate must meet and one requirement will be a minimum personal net worth. Before you commit to any franchise concept, you’ll need to know your documentable net worth. Every franchisor and lender will have a measure of net worth they want you to meet as assurance you are solvent enough to launch a business successfully.
To calculate your net worth, start with a summary of your assets, then subtract your liabilities. Don’t forget to include investment and retirement accounts, annuities, and any loans in your name.
Net Worth = Assets - Liabilities
If you have a low or negative net worth number, you probably need to wait. Take some time and beef up the asset side of your balance sheet (or reduce the debt side) before moving forward with franchise investment.
In general you can expect to need a minimum of $100,000 of net worth to become a franchisee. This is not a hard and fast rule, just a general idea for your expectations. Every franchise will have different requirements.
Liquid capital is the money you could produce in cash or easily convert to cash. Your liquid capital includes funds in savings accounts and accessible stock investments. If your net worth is within the recommended range your franchise consultant or your preferred franchise suggests, your next step is assessing your liquid capital.
There are no hard rules for liquid capital requirements. You can expect to need a minimum of $50,000 to $100,000 of liquid capital for a service-based franchise concept. A facility-based franchise has a higher minimum of around $75,000 to $100,000. Depending on the size of the commitment you make, you might need substantially more money at the table. A multiple territory development or an extensive and costly facility will have a higher liquid capital demand.
Keep in mind that these numbers only represent your liquid investment—not your total stake. Your total investment will include the liquid assets along with any financing you secure. Your total available liquid capital may not all be sitting in a savings account. You may also have convertible assets that can add to your total.
Your credit history is a less tangible but vital part of your financial self-assessment. If you’ve made a habit of keeping your financial house in order, you’ll be rewarded when franchisors start looking at your suitability for their brand.
Franchisors may consider your credit rating, proven financial stability, tenure as an employee in various positions, and payment histories when they weigh the risks of granting you a franchise. As part of your due diligence, order a copy of your credit report or use one of the many credit reporting apps available, and look for any inconsistencies or concerns. You’ll need to be prepared to explain any issues you find.
With your business plan in hand, it’s time to tap all your available resources to find the best possible financing at the lowest cost to you. As you enter this phase of capitalization, keep in mind that there are lenders, accountants and attorneys who specialize in franchise financing. In some cases, they represent your best chance of a smooth, successful financing experience. We recommend starting your financing investigations by weighing your ability and willingness to leverage your assets and working your way from there to conventional and other potential lending sources.
Homeowners may be able to leverage your home equity through a home equity line of credit (HELOC) or a home equity loan (HEL). The most significant advantage of this is that leveraging your existing equity should be possible at a relatively low interest rate. The disadvantage is the inherent risk involved in putting your home up as collateral for your business. Always take care not to assume more risk than you could handle.
You can leverage retirement funds for your business investment and avoid penalties. Specialized companies can help investors take advantage of the Entrepreneur Rollover Stock Ownership Plan (ERSOP) or Rollovers as Business Startups plan (ROBS) to fund new businesses.
In these scenarios, your retirement funds become an investor in your business instead of being invested in publicly traded equities or fixed-income investments. Using this kind of account is quite complicated. Make sure you work with a reputable investment professional to ensure your ERSOP or ROBS is set up and executed correctly. Some of the biggest mistakes franchise candidates make are at this stage. Your local bank may offer the service, but going with a company that has experience will help you.
As with the use of home equity funds, use caution as you look at utilizing retirement dollars. Know the risks of putting this money earmarked for long-term security on the line for a business venture. Franchises, as with all investments, have risks and can fail.
Gifts, loans, and investments from family members can be a great source of capital for your business. Some candidates will approach their close family members in hopes that everyone will reap the benefits of a successful franchise location. If you do accept funds from people you have personal relationships with, make sure you have an agreement in writing. Include the terms and conditions of the gift, investment, or loan clearly outlined— including investment terms, payback terms, interest, and what happens if you default. Having the details hammered out in an agreement may prevent a misunderstanding down the line.
Franchisor financing is sometimes offered directly from a franchisor and sometimes provided through a third party prearranged by the franchisor. Programs vary widely, but some of these arrangements have notable benefits.
For example, some may not require collateral; others might offer equipment leasing; some offer deferred payments. Many have low-interest rates, but others may not even be competitive with traditional loans. Check with your franchisor to see what programs it may offer, then be sure to compare all the choices available to you.
Some companies specialize in financing franchise businesses and can offer assistance with figuring out how to capitalize yours. These companies understand the franchise business model and have relationships with financial institutions that fund franchise loans.
Some also specialize in assisting clients with utilizing retirement funds as ROBS (Rollovers as Business Startups plans) and in securing U.S. Small Business Administration loans. In many cases, these companies have pre-approved dollars set aside to help people invest in franchised businesses. This can streamline the process of getting your investment dollars.
Another alternative is to leverage conventional business loans or commercial loans. There are many types of commercial lending, including secured and unsecured loans, short- and long-term loans, equipment loans, and business lines of credit.
Expect to put up at least 20% of your investment to be considered for these kinds of loans. Be aware that many traditional lenders may not understand the franchise business model, unlike lenders who specialize in this area. As with any financing source, it’s always in your best interest to shop around, so make sure you check out business loans at multiple financial institutions.
The SBA offers loans through participating banks and lenders. Since the SBA will guarantee up to 85% of the loan, there is less risk for the lender—which can translate to a lower interest rate for you. SBA financing is not a government loan, but rather a private loan backed by government funds. There are multiple types of SBA loans you can investigate.
Make sure you carefully evaluate the pros and cons associated with taking out an SBA versus a traditional loan. This can include loan establishment cost, the length of the loan, and the interest rates of the loan. Note that if your franchise company is listed on the SBA registry, it may help expedite the process for a new franchisee to get an SBA loan. Also worth noting is the fact that individuals with high net worth may not qualify for this type of loan.
This is a personal decision that every franchisee should make for themselves. We have seen some great partnerships. We have also seen some terrible ones. A partner may provide an influx of capital, but you should consider that person owns a portion of the business. You will need to work together every day for success.
Partners that don’t outline specific duties and areas of responsibility are more likely to fail. When considering a partner, make sure you have serious discussions before agreeing to work together. If the partnership fails, the business will suffer. A suffering business becomes a very risky investment.
You first step should be scheduling a free consultation with a HIRE YOURSELF consultant. They can help you navigate the process of matching to the best franchise for you, guiding you through your investigation process, being introduced to a franchisor, and given suggestions for funding experts to help you.
HIRE YOURSELF has great relationships with the best franchise funding experts currently in business. We are more than happy to connect you with our trusted partners. You can hear from some of them on the HIRE YOURSELF podcast.