October 26, 2018
When choosing a franchise to buy, budget is an obvious factor. With many first-time franchisees wondering where to start, the franchise attorneys at Soden & Steinberger, APLC can offer brief and helpful insight to allow you to take the next step toward becoming a franchise owner.
If you have a budget of less than $150k to buy a franchise, your opportunities might be someone confined—that said, there are still plenty of possibilities to consider. Some home-based franchises are available under this threshold, with the franchisor covering a portion of the costs. Think tutoring, cleaning, sales, and other service businesses. Many of these franchises might require a company vehicle—an expense, indeed, but one that costs far less than a traditional office space.
Retail is undoubtedly the most financially demanding arena for a franchisee, largely because of the lease required for brick and mortar operations and the competition for prime retail space. Stores, restaurants and the like typically command $250k to upwards of $1 million for a franchisee to purchase a location from a name-brand franchisor. Some franchises can exceed $2 million depending on the company, market and other factors. Note that larger price tags usually represent a greater opportunity for return on investment.
Many franchisors will provide earnings claims, allowing you to see the revenue that franchisees at different levels of performance were able to generate over a certain period of time. Use these documents to begin writing out your budget and potential expenses.
Keep in mind that if you’re in a higher priced market than where the franchisor is based, there could be a discrepancy between their reports and your costs for rent, wages, etc. This can happen in vice-versa, as well, where your rent and employee costs are lower than those of the franchisor. The fool-proof way to get an accurate gauge is to speak with current franchisees, especially those near your prospective territory. They are not off limits at all; in fact, most trustworthy franchisors will encourage you to speak with their franchisees and ask about their experience with the company.
Item 7 in the Franchise Disclosure Document (FDD) will outline your initial investment, including tenant improvement costs if applicable. Again, it’s important to consider both where the franchisor is from and where you’re looking to buy. If they’re from California and you’re buying a location in California, they likely have their numbers correct. Meanwhile, franchisors from out of state often underestimate the cost of doing business in the Golden State. Make sure you speak to as many local franchisees as possible to vary the range in Item 7. If the initial investment is uncomfortable for you to finance alone, you might think about bringing in one or more partners to purchase the franchise with you.
If you’re opening a brick and mortar restaurant, it could take six months to a full year to sign a lease, build out the space, hire employees, train them, and finally, open the doors to customers. Do you have ample savings and/or supplemental income for this “downtime?” Many franchisees find themselves fearful when signing their franchise agreement, because the reality sets in that they will be spending money and not making money. Account for downtime early in your budgeting so you can move forward with confidence when it comes time to put ink to paper.
These are only the basics of budgeting to buy a franchise. For a free franchisee consultation, contact Soden & Steinberger, APLC at 619-239-3200.