We often get asked how much money is needed to invest in a franchise. The answer is that it depends on the franchise. Many elements make up the required investment amount. Generally, this includes the following:
- Establishment cost – This is the capital required to pay for everything needed to establish the outlet and will typically include fixtures, fittings, signage, opening stock, and furniture
- Initial fee – The initial fee (also known as the Franchise Fee or Joining Fee) is a fee the franchisee pays to become part of the franchise network. It usually covers costs like initial training and assistance with the launch.
- Working capital – The working capital required depends on the franchise and how soon the specific franchise can be cash positive. It’s essential to ask the franchisor about the working capital they estimate, as this may vary based on the size of the outlet and other variable factors. Typically, retail outlets may start a month before the opening date to recruit and train staff and the franchisee. Therefore, the franchisee would have to calculate staff salaries and their own salary and include that in the working capital amount. Many franchises in South Africa don’t provide for a franchisee salary in their cash flow projections, so the franchisee must have the means to cover this.
- Rental deposit or rental guarantees – The landlord will require the franchisee to provide a guarantee or deposit of approximately two months of rent, although this can vary.
As a rule of thumb, a franchisee could apply for finance of up to 50% of the total investment amount. Therefore, when applying for a franchise, keep the following in mind if you intend to apply for bank finance:
- You should have 50% of your funds available in the form of cash. Often referred to as unencumbered funds, these funds should be liquid and in the form of investments, money in the bank, or policies that are about to pay out in cash. The franchisor will likely request proof of funds available, in addition to a personal balance sheet (list of your assets and liabilities)
- Be as accurate as possible about the cash available to invest. Franchisors get many requests for information and are most likely to act on a request if there is an indication of available funds. Be honest in your disclosure. If you can’t afford a franchise, look for something within your investment range.
- Be clear about your investment timeframe. If you plan to work for another year to save up for contingencies, make this clear to the franchisor. It may just be that this coincides with their development plans for a particular area. It also takes time to find the ideal site, so if you don’t have a site in mind, applying before your ideal starting date is advisable.
In summary, it’s best to be upfront with the franchisor about the cash available to invest. Remember that you can apply for bank finance for half the total investment required. Franchiseek South Africa is partnering with Nedbank to connect franchisees with the bank. If you want to speak to the bank about finance, click on the banner next to this article to start your journey.