The financials are the backbone of any franchise business, meaning it’s crucial for any prospective franchisee to understand what to look for in an opportunity and challenge franchisors with key questions about what financial returns they expect.
Here, Frank Milner, President of global tutoring franchise, Tutor Doctor, provides his advice on the things to look out for and what to ask. Frank also offers reassurance that it’s ok to join a franchise to make money, breaking down the stigma of being financially ambitious.
First things first: before having conversations with a franchisor about the finances, it is really important you have a firm grip on some of the common terminology you’re likely to encounter. Here is a quick overview of some of the terms you’ll need to understand:
- Initial franchise fee – the upfront cost to join the franchise. Covers training, support and the rights to use the brand.
- Royalty fee – an ongoing percentage of your revenue or sales paid to the franchisor. Also called the Management Service Fee (MSF).
- Minimum investment – the lowest amount of money required to start the franchise, including fees, equipment and initial operating costs.
- Working capital – the funds needed to cover daily operating expenses until the business becomes profitable.
- Liquid capital – cash or easily accessible funds required to invest in the franchise. Franchisors often specify a minimum liquid capital investment.
- Return on investment (ROI) – a measure of how much profit or benefit you earn compared to your initial investment.
- Breakeven – the point at which you have generated enough income to cover your start-up costs – everything from this point onwards becomes hard profits.
So, you’ve got to grips with the financial jargon, and now it’s time to dive deeper with your research. This is an essential stage when exploring franchise opportunities. Think about what similar franchises are asking for in terms of investment and ask yourself: why is the franchise you’re considering priced where it is in the market?
Beyond the costs, it’s equally important to evaluate the earning potential and understand the biggest financial challenges that might arise. Ask yourself how resilient the franchise is at different times of the year or through various economic conditions. This thorough approach will help you to make informed decisions.
Once you feel confident with the research you’ve done, it’s a great idea to prepare a list of questions to ask the franchisor. To truly understand the nuts and bolts of your finances, you need as much information as possible. Some great questions to consider include:
- What is the total investment required?
- What are the typical profit margins?
- How long does it take to break even?
- What kind of financial support or resources will you receive?
- What are the ongoing fees? And how will they impact profitability?
Having your questions prepared is a key step, but there are more things to understand about franchise finances before you sign the dotted line.
Remember, becoming a franchisee isn’t like starting a new job – you probably won’t be earning right away. Building a successful franchise takes time, and patience is essential as you work towards reaching your full revenue potential, as it may take several months to get there.
This timeline is influenced by various factors, but when investing in a brand-new territory, it can take longer to see a return as you need to establish yourself from the ground up. However, if you’re purchasing a resale territory, the business is already operational with an existing customer base. Understanding these differences can help you set realistic expectations and better prepare for the journey ahead.
One final thing to consider is to keep sight of your ultimate goal – remember, it’s okay to want to make money!
Whether you’re buying a franchise, starting a business or stepping into a new opportunity, there’s often a stigma attached to financial success – but why should there be? Earning more money can bring financial freedom and security, empower others through your successes and create opportunities for personal and professional growth and learning. After all, isn’t that part of why we want to go into business in the first place – to make money and live abundantly? With a franchise it is no different; you can make money while having a lasting, positive impact on those in your community, ultimately illustrating that profit is not a dirty word!
