Considering investing in a franchise in 2024? The journey of franchise ownership is an exciting one, granting franchise owners the ability to be their own boss and build a thriving business within an established support system. However, before you can become a franchise owner, you first need to develop a concrete plan for how to buy a franchise. This process is complex and may sound daunting, but we’ll walk you through it all, equipping you with the franchise financial planning knowledge and tools you’ll need to achieve your goals.
Make sure you understand your total financial commitment
Before you can dive into the specifics of financial planning, it's essential for you to first grasp exactly what you will owe—and when. Often, those exploring the path to investing in a franchise have not owned any franchise before, and that lack of experience can translate to an incomplete picture of your total financial commitment. By taking the time to understand finances now, you’ll be more prepared to create a robust and actionable financial plan.
Your first and often most major financial obligation starts with the initial franchise fee, which is the upfront cost for the right to use the franchise brand and access support services. This is typically a one-time fee that can range anywhere from $20,000-50,000, according to the Small Business Administration (SBA). Most other fees will be paid on a regular recurring basis. For instance, franchisees are typically required to pay ongoing royalty fees, which are a percentage of their revenue.
You’ll also have to be prepared for various ongoing expenses that are integral to the operation and growth of the business. For instance, marketing expenses are another critical component, as franchisees contribute to national or regional marketing efforts to promote the brand collectively. Operational costs, such as rent, utilities, and staffing, also add to your total financial commitment.
As you tally up these costs, realize too that each franchise is different. Make sure you understand exactly what you’ll be required to pay for the specific franchise that you’re interested in. For instance, Spherion’s franchise fee is $40,000, but we offer discounted franchise fees for veterans or members of SBA-recognized ethnic minority groups. Once you’ve gotten a detailed understanding of these multifaceted costs for your desired franchise, you’ll be better prepared to make informed decisions, create a comprehensive financial plan, and navigate the intricacies of funding a franchise.
Take stock of your personal finances
Now that you have an idea of how much you’ll have to pay upfront and every month, you can begin to take a look at your own personal finances to determine how ready you are for funding a franchise. Assessing your personal finances should involve a comprehensive evaluation of your assets, liabilities, and credit scores. To help you do this, you may want to explore financial planning software, budgeting apps, and credit monitoring services that can assist in this process.
You may come out of this assessment realizing that you’re already in pretty good shape, or that you don’t have far to go before you can make the leap to investing in a franchise. That’s great! But if it appears that you have a significant distance to cover before affording the opening of a franchise, there are strategic steps you can take now to bring you closer to your goal. Begin by creating a detailed budget that identifies areas where you can cut unnecessary expenses and redirect funds toward savings. You may want to make this more structured by automatically setting aside a predetermined portion of your income regularly.
Additionally, seeking out professional financial advice can optimize your current financial situation and give you helpful guidance on strategies for reaching your franchise ownership goal. And of course, there’s always the option of exploring the idea of partnering with a lender to help get you up and running.
Create a budget for your franchise—both initial and ongoing
Once you’ve assessed your finances, you can start to create a realistic budget. By now, you’ve definitely started the budgeting process as you’ve gone through the other financial planning steps, but we’re now going to make sure it’s as real and concrete as possible—encompassing not only the initial investment but also recurring expenses and anticipated cash flow.
Start by identifying all potential costs associated with franchise ownership, including the initial franchise fee or franchise resale costs, ongoing royalty fees, marketing expenses, and operational costs. Research and estimate each component based on industry benchmarks and the specific requirements of the franchise you're considering. Factor in additional costs for leasing a location, staffing, utilities, and any other relevant expenditures.
Next, compare this budget to your financial assessment and figure out a realistic timeline for opening the franchise based on how much you still need to save or acquire through a lender. You can check back in to regularly review and adjust the budget as needed—after all, life happens—but make sure you at least have a starting place to guide your financial decisions and serve as a roadmap going forward.
Explore possible financing options
Not everyone has the liquid capital required to invest in a franchise outright, and the path to individually saving enough for franchise ownership can feel out of reach for some. In these instances, financing options can play a critical role in your financial planning. Some of the most commonly relied-upon options for franchisees include:
Traditional bank loans:
Many entrepreneurs opt for conventional bank loans, which offer a lump sum amount with a fixed or variable interest rate. The terms and conditions vary, and you may need to provide collateral and demonstrate a strong credit history.
Small Business Administration (SBA) loans:
The US Small Business Administration provides loan programs specifically designed for small businesses, including franchises. SBA loans often have favorable terms and lower down payments compared to traditional bank loans.
Some franchisors offer financing options to their franchisees. This could include partial financing of the initial franchise fee or assistance in securing third-party financing.
There are online lenders and alternative financing options that cater to small businesses. These lenders may offer quicker approval processes, but interest rates could be higher.
If you are considering working with a lender, before you choose a loan option, you should carefully evaluate the terms, interest rates, and repayment schedules. Remember that it may take you several months to break even once your business opens, and any repayment schedules should factor that in.
Lean on your franchise development team for financial tools
Finally, don’t discount the help offered by your chosen franchise! Franchise-specific financial tools can provide valuable insights into the financial feasibility of owning a particular franchise. These tools often include financial projections, investment calculators, and performance benchmarks specific to the franchise industry. Leveraging these resources enables prospective franchisees to make informed decisions based on the financial realities of the chosen franchise opportunity.
Some franchisors provide more hands-on financial support. For instance, Spherion offers training programs, marketing assistance, and operational guidance to its franchisees to bring them closer to their financial goals. At the same time, other franchisor services may lessen your financial burden. Spherion makes the weekly payroll, handles associated federal, state, and local taxes, and manages the invoicing and collections process. This reduces your ongoing cash requirements and enables owners to concentrate on developing and growing their business. For precise and current information on any financial tools and service offerings provided for franchisees, we recommend you reach out directly to your selected franchise or consult their official documentation.
Make your entrepreneurial dreams a reality
Embarking on the venture of franchise ownership is exciting, but franchise financial planning is a meticulous process that can’t be rushed. From assessing personal finances to utilizing franchise-specific tools and exploring financing options, a comprehensive financial plan will give you the insights you need to successfully determine your financial readiness for franchise ownership. And for more detailed information on franchising with Spherion and financing, we encourage you to reach out to us directly for any answers you may need.