I asked many questions of the franchisor when I started my first franchised business but if I had my time all over again I would definitely ask these five money questions to ensure that my first year wasn’t so stressful.
1. What operating capital will I need until the profit starts to roll in?
I had prepared my initial budget that covered fit-out and equipment and all fees including the franchise fee, design fee and the rental guarantee. I had incorporated money for the opening marketing spend and wages for the training of staff. What I hadn’t budgeted for was the expense of the marketing redemptions, the cost of goods for the product and the extra staff required to make the product. I had budgeted for a wage for myself, but really could not pay this from day one because there were other expenses to pay. The upfront payments for stock, insurances, IT support, gas and electricity bonds, local government licences and bank set up fees for example. There were extra staff uniforms and small plant and equipment to buy that were not included in the initial start-up pack. I thought I had budgeted for everything but in reality I had not. Ask other franchisees in the system about their cashflow in the first few months.
2. How long until the business should be breaking even?
I naively thought that as from day one, I would be banking money so therefore I would be profitable. Not so, whilst I was operating within the franchise guidelines my Key Performance Indicators (KPI’s) were at the higher level than what was recommended. It took me 6 months to refine and lower my KPI’s to a profitable level. After all, you are learning a whole new business and training staff in a whole new process. Starting a greenfield business comes with a lot of training and training costs money. Now when I open a business I know the exact amount of sales I have to make from the very first day to break even.
3. How much extra cash will I have to access until the store breaks even?
This is probably a question for your accountant or business advisor. Do an accurate analysis of how much it is costing you to live each month. Include the school fees, the car payments, the rent payments, entertainment – the lot. Work out your monthly spend and how much you will need until your store breaks even. Add a few extra months than you think you need to be safe. This will reduce the stress of meeting your day-to-day expenses whilst you are focussing on making your business profitable.
4. What financing options exist and how much money do I have access to?
There are four main ways that people fund the purchase of their franchise.
- Equity in assets
- Access to Franchisors accredited lenders
- Or a combination of all of the above
5. How financially strong is the franchisor?
This question is rarely asked but is so important. If the Franchisor is struggling to pay their bills then the support they can give you is diminished. The possibility that they are going to be bought out by someone else is very high and with new ownership comes new rules and a new operational regime. You would have done extensive research on how you are going to work with your franchisor only to find that under the new ownership model it has all changed and there is nothing you can do about it because your franchise agreement has to run its full term.
I asked so many questions before buying my first business. As I grew my portfolio of franchised businesses the number of questions I asked also grew. If I was to buy a franchise tomorrow there would be even more questions that I would ask, but these five would be amongst the first!
Thinking of buying a franchise business? Do you want to make the wisest and safest decision before entering a franchise agreement? Then our Franchise Opportunity Assessment and Advice service might be for you.
Elizabeth Gillam founder and CEO of Franchisee Success creates High Performance Franchisees. Having owned and operated three franchised food businesses; Boost, Healthy Habits and Bucking Bull; she knows what it takes to operate a profitable food franchise. In her recent book, Upsize your PROFIT – 6 steps to running a profitable food franchise she outlines how franchisees can ACE their franchised business unit.