The biggest question that most people have when considering a franchise revolves around one very important topic:
Money!
How much do you really need to start a franchise?
The initial investment range for the majority of franchises is typically going to be somewhere between $100,000 and $300,000 but ultimately could start closer to $50,000 and go up to over $1,000,000.
That’s a pretty big range, so let’s break it down to make it clearer.
Every franchise brand in the United States is going to provide a line-by-line breakdown of their initial investment range in their Franchise Disclosure Document (FDD). This is required by the Federal Trade Commission (FTC)and has to include reasonable estimates of every expense that someone could incur in launching the franchise and operating the business throughout the initial period (generally defined as a minimum of the first 90 days of business) as well as who those payments are made to and when they will be incurred.
Common items you’ll find in this initial investment breakdown include:
- Franchise Fee
- Real Estate/ Leasehold Improvements
- Equipment
- Inventory
- Initial Marketing
- Wages for Employees
- Professional Fees (ex. Legal and accounting)
- Additional Funds (ie., working capital)
As you can see, those initial investment ranges aren’t just some lump-sum check that you are writing to the brand but rather a lot of smaller amounts being paid to different parties over time.
Now that we have a better idea of what all goes into the initial investment range, we have to hit the real question: “How much money do I need to start a franchise?”
You know the initial investment range for the franchise you are considering, so that’s the amount of money you need to have available, right?
Not necessarily.
Most people aren’t covering their initial investment ranges from cash they have in a checking account. Instead, they’re likely using some personal funds in combination with another funding strategy. A good rule of thumb is to plan on putting down at least 20% of the total initial investment if using debt funding.
Common funding strategies include:
- Small Business Administration (SBA) Loans
- Rollovers as Business Startup (ROBS)
- Commercial Bank Loans
Franchisors will anticipate most prospective franchisees using some type of funding strategy like those above and will have their own internal financial requirements for consideration based on what the banks will need to see to underwrite a loan.
The two primary financial requirements they will have are:
- Liquidity
- Net Worth (Total assets- total liabilities)
Your liquidityis going to factor in any and all assets that can be quickly converted into cash, such as: cash, stocks, and bonds. Since 401(k) rollovers are popular funding strategies in the world of franchising, many brands will consider funds in retirement accounts as liquid assets.
Net worthon the other hand is going to be the value of all your assets (ie., bank accounts, brokerage accounts, retirement accounts, real estate, vehicles, etc.) minus your total liabilities (ie., outstanding mortgage, vehicle loan balances, student loan balances, credit card balances, etc.).
Knowing where you stand on these two metrics will be important as you start your exploration into the world of franchising.
So, how much money do you need to start a franchise? As you’ve learned from this article, there’s a lot to unpack to really answer the question and now that you have the key points, you should feel more confident approaching the idea of franchising from a financial perspective.
