Interested in a Franchise? Ask Yourself These 8 Financial Questions

Interested in a Franchise? Ask Yourself These 8 Financial Questions

It’s no secret that veterans transitioning from the military back into civilian life are increasingly turning to the franchise model when their goal is to own and run their own business. Rather than trying to build a business from scratch, it makes sense to buy into an opportunity that gives you a solid foundation to build upon, including a proven business model, training, operational guidelines and other support. Combine those attractive features with plenty of companies who offer special discounts to veterans, as well as lots of financing opportunities geared specifically towards veterans and it starts to feel like business success is within reach. But the two key words above are “buy into.” You do have to buy your franchise, and when you take the plunge, you’re making what will probably be the single largest purchase of your entire life. I know that sounds dramatic, but it’s important to go into this with eyes wide open to avoid what can easily become the worst decision you’ve ever made. While it is both exhilarating and exciting to sift through the hundreds of excellent franchise opportunities available today, the most important thing you can do is take the time to ask yourself the following eight key financial questions to make an informed decision:

1. What’s the total investment involved?

This is always a huge range because of the number of factors that can vary according to your unique situation. The key question is this: What is the lived experience of other franchisees who have already been through the process? Take the time to find and talk to other franchisees in comparable markets to see how it went for them, and keep your estimate on the high end.

2. How much do you need in cash reserves for working capital?

It might be weeks or even months before your new business reaches its break-even point, which means you need plenty of operational cash reserves to see you through during the start-up period. Do your homework to estimate the cash you need to provide adequate buffer, and once again keep your estimates on the high side.

3. How will you cover your living expenses during your start-up phase?

This is one of the key financial questions many franchisees fail to ask: What are you going to live on during the time it takes for the business to become profitable enough to cover your living expenses? Come up with an accurate figure of what you need each month for living expenses and then estimate how many months you need to cover until your business is successful enough to cover it. Avoid being overly optimistic about how soon your business will be profitable and realize that this piece is over and above the overall business investment you’re already making.

4. How long will it take to reach your break-even point?

Although this is hard to pinpoint concretely, you should be able to come up with a realistic range, with the caveat that it almost always takes longer than most people think it will take. Once again this is a great time to take a hard look at the lived experience of other franchisees in comparable markets and plan accordingly.

5. How much of your total investment needs to be in cash?

This will vary by franchise, but it’s a must-know for you. And don’t forget to include those cash reserves I mentioned earlier.

6. What are your financing options?

If you opt for a loan, your lender is going to want to secure with collateral, such as the equity in your home, a Small Business Administration (SBA) guarantee program or both. Other financing options include family and friends willing to support you, as well as organizations that help you gain penalty-free access to the money in your IRA and 401(k) accounts to start your business.

7. How much money will you be able to make?

This might be the most relevant of the financial questions. The potential profitability of any franchise can be calculated using a wide variety of metrics, but there are three that are especially important to examine: average operating income (earnings before interest, taxes, depreciation and amortization, also called EBITDA), average revenues, and the average sales-to-investment ratio.

8. Is the franchisor financially strong?

The financial health of your franchise’s parent company can have a significant impact on your success as a franchisee. Get the audited financial statements for the franchisor, and if you’re not confident in your ability to read, understand and interpret the financials, find someone who can help you make sense of it.

Answering these eight financial questions for multiple franchise opportunities is not a small undertaking, but the time and effort you put into it will pay off by giving you a realistic picture of what to expect financially as you make your dream of owning and running your own business a reality. Contact VFC today to begin your journey to franchise success!

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