How much up-front money is required to start a franchise?

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There’s a wide range of franchise options available to someone that’s shopping for a franchise.

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Retail

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If you’re looking for a retail location you’ll want to have 30-50% of the total cost available in cash for the purchase. An average retail location begins at approximately $80,000 and goes up from there. There are many options in the $150,000 to $250,000 range including clothing stores, restaurants, digital stores, office service stores, light manufacturing, and equipment stores. For a large location or a stand-alone building, the average price can be over 1 million dollars.

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Service

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There are many service franchises that start at $30,000 and go up to around $150,000. These types of businesses can be ideal for first-time business owners or business owners that are looking to invest a smaller amount of capital. We encourage fiscal responsibility in managing cash flow and initial investment cost; therefore, service businesses can be an ideal option for many franchise owners. These types of franchises include business services, professional training services, construction-related services, pet care services, cost reduction services, child development, and senior care, just to name a few.

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When will I achieve a return on my investment?

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It is different for everyone and every business. Franchising is a unique system whereby the franchisor can assist you with a marketing plan that will show you the production you will need to achieve at each step in order to obtain the financial goals you set for yourself. There are some franchises that have a very quick return on investment, estimated at only a couple of months, and others that estimate several years to have a return on the investment.

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How much can I earn as a franchisee?

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This is variable depending on your willingness to follow the system, the franchise system’s realistic earning capabilities, and the focus that has been placed on marketing and sales. Some franchises earn $40,000 a year and others earn 1 million dollars a year. There’s a very wide variance between the different systems. The goal with a franchise is not only to earn a profit from the daily business activities but to have the franchise business finance other investments and assets like real estate, equipment, and other business ventures. A franchise can be a tool to help you take advantage of major tax savings, work as a vehicle to purchase assets and, in many cases, create ongoing passive income streams once the business is set up and functional. Therefore, there are many income streams available to a franchisee that go beyond the day-to-day activities of the business.

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How do I find out how much other franchisees earn?

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I’ll give you an evaluation tool that will help you to ask the questions needed to investigate the earnings of franchisees currently in the system. There are simple ways to obtain these numbers, to understand what the total royalties being collected are as well as how much an individual franchisee earns. You’re always allowed to ask a franchisor for all cost information. They are required by the Federal Trade Commission to provide you with this information. They’re allowed to disclose earnings information ONLY if they have properly disclosed that information in their Franchise Disclosure Document. Earnings can therefore be more challenging to obtain without the knowledge of how to read the financial statements and what to ask the franchisees. I’ll provide you with tools to help.

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What type of support is included?

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This is a very important question for a franchisee to ask. There was a study reported in Franchise Times, conducted by professors at Florida State University and the University of Illinois at Urbana-Champaign; the study surveyed 100 franchise concepts to determine the one factor that made some franchise systems more successful than others. They concluded that the amount of initial and ongoing training was directly proportionate to the success level of the franchisees in the system.

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Therefore, we believe that solid and lengthy training programs properly prepare a franchisee for success. There are so many facets to business and it takes more than a week to learn all of them. We encourage prospects to look for franchise systems that have a minimum of two weeks of initial training, a library of past training for on-the-job reference, and a very strong ongoing coaching and support program. We also encourage franchisees to use the resources available to them because it will make a dramatic difference to your financial success.

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How do I obtain funding?

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There are many funding programs available.

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Retirement Plan Rollovers

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The most common and widely used funding option currently is 401k and retirement plan rollovers. The reason why so many new franchisees choose this option is that they can take a salary from day one, eliminating any paycheck phobia.

You can reinvest a larger percentage of your earnings as pre-taxed dollars and the government encourages rollovers by not taxing the money when it is used in an investment like a business or a franchise.

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Unsecured Lines of Credit

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These are available to individuals that would like to leverage their entire investment. There is little money required down and an individual can borrow up to $150,000.

There are considerable fees that are tacked onto the amount borrowed and the interest rate is around 12%. This can be a great option for someone that does not want to use their cash but wants to get started. If you take this approach, we encourage you to be very conservative with your initial purchase and choose a low-cost franchise system.

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SBA & Traditional Loans

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In order to qualify for an SBA or traditional bank loan, you must have a credit score equal to or above 700. The owners must have management experience in the same or similar field. The lender will require franchise documentation. They must verify the owner’s equity investment of 30%-50% up-front. They must also verify exactly what needs to be funded with the loan. You must be specific, very exact, and include a well-thought-out breakdown. The final requirement is a very detailed and believable monthly financial projection for years 1, 2, and 3.

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How much should I spend on a franchise without risking all of my investment?

 

Leverage your investment with borrowed funds if you do not have a 401k. We recommend no more than 70% of your investment amount should be spent on business set-up fees.

For those that are extra conservative, 50% is a good safe number to work from. It may take a little longer than expected to get everything up and running, so having that extra cushion for working capital is a responsible way to approach the business.

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What Can a Franchise do for me that I can’t do for myself?

 

Purchasing a franchise ensures that you are buying into a functioning and proven business model. There’s a considerably lower rate of failure for franchisees than for entrepreneurs with original business concepts in a start-up business. Additionally, many franchises profit because the items/services they sell already have a name and a reputation behind them.

Franchisors provide bulk purchasing power (much like wholesaling) which you wouldn’t have without the franchise system. Because all of the franchisees in a system contribute to the expense of creating the software, systems, tools, etc., the quality of those resources is superior to resources provided to non-franchised businesses. If one tried to recreate those distributables, the expense would be far more than what one had invested in the franchise fee and the quality would be sub-par.

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How does the franchisor make money?

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Characteristically, a franchisor sells the right to a franchise for an initial flat fee called the “franchise fee.” This fee is in addition to the actual costs associated with opening a franchise unit in one’s local market. Some franchisors will often receive ongoing payments, such as royalty fees, taken as a percentage of sales. In exchange for these payments, the franchisor will often work as a “back office” or provide other services that eliminate the need for additional support and administrative assistance. Many franchisors will also sell supplies and/or services to their franchises.

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Are there any current trends in franchising?

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There are a plethora of trends in the franchise arena. Green businesses are swiftly growing in today’s economy; these franchise concepts focus on energy-reduction services for homes and businesses. Fitness, health, and personal care will continue to expand due to childhood obesity problems, baby boomers looking to “get fit” and nutritional programs for those living healthy lifestyles. Recession-proof brands are understandably popular in today’s economy. Many people who buy a franchise concept do so because they’ve been laid-off due to a declining economy. With that in mind, many want to ensure they‘re purchasing a business that won’t be affected by the economy in the event of another recession.