Introduction
Becoming a franchisee can be an exciting venture, offering the opportunity to run your own business with the support of an established brand. However, while franchise ownership can be rewarding, it also comes with its share of financial risks. To ensure your franchise business thrives, avoid these three major financial mistakes:
1. Underestimating Initial Costs
One of franchisees’ most significant mistakes is underestimating the initial costs of starting a franchise. While the franchise fee is a significant upfront expense, there are many other costs to consider, such as equipment, inventory, site improvements, lease deposits, and working capital. Failing to budget adequately for these expenses can lead to financial strain and even the failure of your business.
To avoid this mistake, thoroughly research and understand all the costs of opening a franchise. Consult with other franchisees, review the Disclosure Document, and work with a financial advisor to create a detailed budget that includes all potential expenses. The franchisor should provide guidance in the Franchise Agreement and Disclosure Document. Franchisees have 14 days to review these documents before signing the Franchise Agreement. Take this time to ensure you understand the financial requirements, including the working capital needed. Ensure that the establishment cost includes aspects such as design fees for the layout and that these costs are based on the location being considered for the franchise.
2. Neglecting Ongoing Costs
In addition to the initial investment, franchisees must consider the ongoing costs of running a franchise. These include royalty fees, marketing contributions, rent, utilities, and employee wages. Failing to account for these ongoing costs can lead to cash flow problems and put your business at risk.
To avoid this mistake, carefully review the franchisor’s financial requirements and projections. Factor in all ongoing costs when creating your budget, and regularly monitor your financial statements to ensure you’re staying on track. The franchisee should draw a market-related salary from the business and ensure this is included in the projections. If a loan is obtained to finance the business, servicing the interest should be included in the projections, and the cash flow projection should provide for loan repayments.
3. Ignoring Financial Performance
Many franchisees make the mistake of ignoring their financial performance or relying solely on the franchisor for financial guidance. While franchisors can provide valuable support, franchisees need to actively manage their finances and understand their business’s financial health.
To avoid this mistake, regularly review your financial statements, including income statements, balance sheets, and cash flow statements. Compare your performance to industry benchmarks and seek advice from a financial advisor/accountant if you have any concerns. Sharing your financial performance with the franchisor is advised, as the franchisor will know the benchmarks that apply to the business. If the business does not achieve breakeven or profitability in the time initially estimated, it’s essential to communicate this to the franchisor to get additional assistance.
Conclusion
Avoiding these three major financial mistakes can help franchisees set themselves up for success. By thoroughly researching and understanding the costs involved, closely monitoring ongoing expenses, and actively managing their finances, franchisees can build a profitable and sustainable business.
