8 Money Questions to Ask about Your Franchising Investment

Jim Gormley, President, The Franchise Consulting Company Canada • December 17, 2020

Owning your own franchise can be exciting and financially rewarding over time. However, it’s essential to know the total costs that are involved to ensure that the franchise is a good financial option for you. So, here are eight important money questions you need to ask to ensure that you make a wise financial decision.

1. What is the Total Investment Cost?

The Total Investment Cost is provided in the Franchise Disclosure Document (FDD), and is typically expressed as a range. It is the total of the Estimated Initial Investment. The range can include fees for a number of items such as:

Franchise Fees
Real Estate or Rent
Insurance
Training
Computer Software
Furniture/Fixture/Equipment costs

These are just some of the costs among many. Be sure to determine precisely what the total investment cost covers by asking the franchisor for a full breakdown of the costs.

2. How much of the Total Investment cost is required in cash?

Some franchisors may require franchisees to invest a percentage of their own cash to the start-up investment to qualify as a potential franchisee. This can be at least 30 - 50% of the total franchise investment cost depending on the franchisor. This is known as unencumbered funds, which means that it is your own money that you can easily and quickly access.

3. How much working capital do I require?

Working capital is the money required to cover the day-to-day operations of your business. The major components of working capital include:

Cash
Debtors (accounts receivable)
Stock (inventory)
Creditors (accounts payable).

Until your revenues grow, you will need enough money to cover these expenses. It’s best to have sufficient money on hand to ensure you have critical financial reserves until you reach a positive cash flow. Consider the stability of the franchise that you are considering to determine what amount of working capital you’ll require.

Tip: To protect your cash flow, it’s a good idea to borrow enough working capital as part of your business loan you get to buy the franchise.

4. How long will it take before the franchise will break-even?

Break-even is the point when the business makes enough operating revenue to cover monthly operating expenses and starts paying back the initial investment. Franchise ownership is a long-term investment however, you want to find out, on average, how fast you can expect to break-even. This is a great question you will want to ask both current and former franchisees to get a sense of a realistic timeframe.

5. How much money can I expect to make?

The amount of money that you can make depends on a number of different factors, so this question will require you to review the Franchise Disclosure Document (FDD) and speak to other franchisees. The due diligence (or research) that you do will help you to assess the financial performance of the franchisor.

When you speak to other franchisees, you could ask them if they are meeting their financial expectations (without directly asking them about their income). While it’s difficult to predict exactly how much money you can expect, make sure you understand what a probable income will be after your third year.

6. How do similar franchises perform?

Knowing how similar franchises have performed is a good starting point to determine if the franchise is financially sound for you. Make sure to speak to a large number of current and former franchisees to understand the low end and high end of financial performance. This will also help to avoid any unexpected financial surprises.

7. What is the financial health of the Franchisor?

You can determine the franchisor’s financial health by reviewing an audited financial statement that is included in the Franchise Disclosure Document. In addition to their financial health, you’ll also want to assess:

Signs of growth
Rate of growth
and, the franchisor’s ability to invest in franchisee training and support.

The strength of the parent corporation is often a major factor in your success as a franchisee.

8. How Can I Finance a Franchise?

No doubt, opening your franchise requires a significant amount of capital. There are a number of different ways to finance a franchise and achieve your dream of franchise ownership. Some financing options that you may want to consider include: commercial bank loans; government programs; friends and family; and the BDC Newcomer Entrepreneur Loan.

With the answers to these important questions, you can decide if investing in a franchise makes financial sense for you. You may just find that achieving your franchise dream is within reach!

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Why Understanding Total Investment Cost is Essential

By Jim Gormley • December 16, 2020

If you’re thinking about franchising in Canada you need to really understand the costs that you will have to pay. It’s best if you know what the costs are going to be when you start to research a franchise rather than at the end. If you know what the costs are, then you can decide what you can afford and which franchises and brands you can consider. The total investment cost will vary based on the franchise segment (for example: retail; personal services; fast food; etc) and the brand that you choose within that segment. So, What is the Total Investment Cost? The total investment cost is typically shown as a range in the Franchisor’s Franchise Disclosure Document. It is the total of the Estimated Initial Investment. The range can include fees for a wide number of costs such as: Franchise Fees Real Estate or Rent Insurance Training Computer Software Furniture/Fixture/Equipment costs These are just some of the costs among many. Be sure to find out exactly what the total investment cost covers by asking the franchisor for a full breakdown of the costs. Franchisors will be able to give you an accurate picture of what you can expect to pay.

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By Joseph Adler, Partner, Hoffer Adler LLP • September 23, 2020

Engaging a franchise lawyer at the right time in your franchise selection process can help you understand and work through important steps to help you make this important decision. This trusted advice and legal review can be critical to a franchisee’s long-term success.