3. What’s my financial and legal position?
Determine if you have enough capital — or access to it — to start or buy a franchise.
You’ll need enough for startup costs and ongoing fees
Each industry and business model will involve wildly different startup costs. For example, a virtual tutoring franchise won’t have the expensive price tag of the real property (real estate) involved in a restaurant franchise.
What types of startup costs can you expect? Good question. Franchise Direct has an always-updated list of initial investments and ongoing costs for many franchises. For example, the initial investment for a Budget Blinds operation may look like this:
Source: Franchise Direct
The U.S. Chamber of Commerce offers startup costs for 10 popular franchises to give you an idea of the units that may resemble the one you’re considering.
In addition to the initial startup costs, entrepreneurs who want to open a franchise are often required to provide proof that they have a minimum liquid cash reserve.
You’ll also need outside experts to advise you
While money helps, entrepreneurs who want to open a franchise need more than cash to get started. You’ll need legal and financial expertise.
An outside expert or two can evaluate the deal and the impact of your choices. “My first franchise was Maui Wowi Smoothies,” says self-identified serial entrepreneur Tom Scarda. “It was a success. I sold it within five years and semi-retired at the age of 41.”
After that, Scarda says he got cocky and tried to run another franchise without any outside help.
“My second franchise was a complete failure and I lost almost my entire life savings. I should have talked to my previous consultant. She would have set me straight and saved me lots of time and a ton of money.”
There are two main reasons you need an expert’s help. The first is because the legal agreement, called a franchise disclosure document (FDD), is not just a contract — it’s a series of contracts. A franchise attorney in your corner is the only way to understand and navigate all of them. Further, your state has its own franchise laws you must know and observe.
But the most exciting way a franchise attorney can help you is by giving you negotiating power. Franchise attorney (and 2020 Legal Eagle) Farheen Ibrahim says,
“Franchisees mistakenly believe that they cannot negotiate the franchise agreement.”
“Some of the most common points we negotiate are financial terms (like lower initial franchise fee, waiver of royalties for a period of time, reallocation of marketing funds to local advertising for some initial period), limitation of the personal guarantee, and a larger protected territory. Sometimes, we are even able to negotiate more favorable post-termination non-competition and liquidated damages provisions.”
The other reason you need an outside expert’s perspective is to help navigate the financial complexities of the agreement and operations. Thankfully, Ignite Spot is ready to help. From bookkeeping and payroll administration to tax prep, cash flow analyses, and even CFO services, your outsourced accounting team can help and advise you through all the financial aspects of buying and running a successful franchise.