Right investment estimates
Financial commitments are required in each franchise. These initial investments in a franchise may range from the start-up cost to the on-going expenses till the company reaches its break-even. As franchising involves potentially large price tags, it is suggested to clarify yourself with the financial doubts before buying a franchise.
The most significant factor that a potential franchisee should consider is regarding the amount of initial investment required to buy a franchise. The start up cost constitutes franchise fee, cash investment, staff training, professional fees, operating license, inventory, equipment and the expenses involved in running a franchisee which includes moving expenses, furnishings, equipment, decor, signs, landscaping and so on.
Franchise fee is the fees for using franchisor’s brand name, successful business model and distribution. The potential franchisee need to be cautious regarding the investment as franchisors often underrate the initial expenses in order to make the franchise appear more favourable. However this may leave the new franchisee with insufficient funding later on when the franchisee have to meet the ongoing expenses. It is suggested to do self analysis of the initial expenses.
Besides initial investments there are regular continuing expenses that franchisee has to make till the store becomes profitable. The regular expenses generally include royalties to the franchisor, fees for advertising, maintenance of equipments, employee costs, insurance, rent and inventory. The break even periods for each category of business vary and the new franchisee has to plan himself accordingly. It is always advisable to have high estimated costs.
Every business has a period of time before it starts to make a profit and pay for itself. Depending on the type of business, this can be anywhere from two months to two years and you need to plan accordingly. It’s better to make your estimate high rather than low. The franchisee is suggested to accumulate sufficient amount of money for the miscellaneous expenses to run the store as one should not run out of cash. The best possible way to evaluate the investment required by the franchisee is to plan the business in advance because besides franchise expenditure there are other expenses that the franchisee should not sideline.