Every time I speak at franchise shows and events, and meet with aspiring franchisees, I hear the same question over and again: “How can I finance my dream of becoming a franchisee and, above all, how much funding can I get?”
Obviously, when you decide to open a franchise, you must expect to pay a portion of the costs and expenses, but you may also obtain external financial assistance. A 30/70 rule (where 30% of the total cost is your personal contribution and 70% is financed) is just an estimate of the financial requirements when launching a franchise company. This ratio can vary depending on the funding sources, the business concept, your profile as a borrower, etc. Considering that there are various specific factors associated with each candidate and each banner, it would be difficult to give an exact answer here. However, there are some basic guidelines to consider:
- Make sure you properly evaluate your personal financial needs
Buying a franchise requires more than business startup costs. You must also plan for the first few months of operations as there is little to no income during this time when you still need to get your business established and to build your client base. The time it takes to turn a profit will depend on the business concept, your business model and its performance, your competition, your market, as well as your skills as a franchisee. In addition to your business startup expenses, make sure you have a financial safety cushion for your personal needs. Usually, the franchisor can give you a good idea of how long it may take till you reach profitability and how much you should plan for during the first months of operations. You must then estimate how much you will need for personal expenses to get the complete picture.
- Calculate the total cost of starting your franchise company
The franchisor will give you the exact amount of the required startup costs, entry fees and investments needed for leasehold improvements, renovations, equipment, products, etc. For more details, watch our Module 1 (Part 1 and Part 2) in our Toolbox. Note that sometimes certain costs are not included in the franchisor’s calculations:
- Lease costs. The building owner may ask you to pay up to 3 months of lease upfront, which may be a considerable amount. Consulting a knowledgeable real estate broker is a smart way to validate the terms of the lease contract you are about to sign and to make sure the premises are adequate. Ask to be referred to our partner Himalaya Real Estate Corp.
- The cost of reviewing your franchise agreement and other legal aspects related to your company. A good legal adviser can save you costly mistakes and help you make your dream a reality without legal issues. Ask to be referred to our partner Fasken.
- The cost of accounting for the sound management of your business, as well as setting up an efficient bookkeeping structure. You must also plan for the expenses related to the preparation of your annual financial statements and reports. Ask to be referred to our expert Business Accounting
* Why not ask other franchisees in the network? They could give you a good idea of the startup costs and operating expenses during the first few months.
- Evaluate the total available amount you can invest in your business project
Your personal contribution portion may come from different sources:
- Your personal savings or love money (love money is given to entrepreneurs by family or friends, and which typically has no fixed repayment terms);
- Property or goods you offer as collateral, such as your home.
Once you have the money you need to start your business venture and your first source of financing, you still need to find financial partners for the remaining portion and thus to finance the balance of the investment required to realize your dream. In Part 2, we shall discuss other possible sources of funding.
Sylvie Grégoire of FlagFranchise