Today we will cover AFFORDABILITY.
Having affordability listed as the second most import factor usually surprises people. Unfortunately, some people feel safe about the decision that they are making, but sadly they end up not being able to afford it. This is where your CPA comes in very handy. We usually use the typical rule of thumb that you should have 1/3 in liquid capital of the total amount of the franchise. You should also have some extra reserves just in case.
Here is an example. The average franchise according to the International Franchise Association costs approximately $150,000. Therefore the average person should have about $50,000 in liquid assets that they are willing to invest. Most people can get the financing for the remaining two-thirds from a SBA approved bank or other financing sources. There are many services available to roll over money from 401k’s and IRA’s to help with the expenses.
The number one reason that franchisees and business owners go out of business is lack of funds. Whether it is a Fortune 500 company or a brand new business, if you cannot pay your bills, then you are done. Do not over extend yourself financially. It is unfair to you and your family. If you take the rule of thumb into account above, you should be all right. But please, consult with your CPA or financial advisor so you can make an educated decision.
The other nice thing about purchasing a franchise is that there is no correlation between the cost of the franchise and how much you can make. Franchises range from approximately $20,000 to over $3 million. The ones that have the large price tags, have large price tags because they have a lot of build out expenses, needed working capital, equipment, etc. Just because they have the large upfront fees, does not mean that it is going to be more successful compared to one that does not. Some of the most successful franchises that I know of are in the $75,000 range or less.
Remember, do not overextend yourself financially and you do not have to spend a lot to make a lot.