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Franchise Opportunity Exploration Starts At The Kitchen Table

Franchise Opportunity Exploration Starts At The Kitchen Table

By FranchiseKing, Guest Blogger
Published: November 4, 2010 Updated: January 20, 2016

If you are considering franchise ownership, the place to start is at your kitchen table...

In order to find out what opportunities you should be looking at, you need to get a legal sized piece of paper, a ruler, and a pen or pencil. Once you have those in front of you, do this exercise;

 

 

1. Put your piece of paper on a flat surface

 

2. Place your ruler on the paper, dividing the paper in half

 

3. Using the ruler's edge, draw a vertical line down the middle of the paper

 

4. On the left hand side list all of your assets. These will include stocks, bonds, IRA's, 401K's, real estate, jewelry, furniture, automobiles, etc. Add them up, and put the total on the bottom.

 

5. On the right-hand side of the paper, list your liabilities. These will include your mortgage, credit card debt, school loans, personal loans, home equity lines of credit, etc. Add those numbers up, and put the total on the bottom.

 

6. Now..and this is the most important part of this exercise- subtract your liabilities from your assets. Put that total on the bottom, in the middle.

 

7. You have just come up with your approximate net worth. {This will fluctuate because of the stock market, and other factors, most of which are beyond your control.}

 

 

What have you come up with? Are you surprised? Is it more than you thought it would be? Is it less?

I have averaged out the net worth's of all the folks that I have helped get into a franchise business since 2001, and have come up with an average net worth of $400k.

 

How does your net worth compare?

 

Let's assume that you finished up your net worth statement, and are ready to figure out the investment amount you should budget for your own franchise business. Here are my thoughts on budget...

First off, you need to know one very important thing about investing in a franchise of your own;

Investing in a franchise is not like investing in the stock market. For example, when you buy an individual stock, the more shares you purchase up front, the bigger the potential payoff. Of course, the more shares you buy, the more money you can lose, too.

 

When you buy a franchise, in every case except one,* the amount you invest does not have a direct bearing on what your potential income will be. Another words, there is no automatic correlation between what you invest in a start-up franchise, and what type of profit you can expect. Most of the folks that I share this with, never knew this fact. They figured that the more you invest, the more your potential income will be.

 

Let's say you have always had your eye on a major food franchise, and the franchise fee is $45,000, with a total initial investment ranging from $350,000 to $400,000.

Do you think that an investment of $350,000 to $400,000 will give you a six figure income? It may, but the investment amount really has nothing to do with it. The amount you can make in any franchise really has to do with several factors;

 

  • Do your skills match what's needed to successfully own and manage the franchise opportunity that are considering?
  • Is the opportunity right for your geographical area?
  • Is it a business that can really grow, or are you buying yourself a job?
  • Could it turn out to be a fad?
  • Can your sales revenue be high enough to support your income goals?

So keeping those thoughts in mind, here is a good rule of thumb for how much you should invest in a franchise of your own.

 

Don't invest more than 15% of your own money in a start-up franchise. What I mean by 'your own money,' is the amount you'll be writing a check for, before a business loan. Here is an example;

Let's say you did your statement, and your net worth is $400,000. Fifteen percent of $400,000 is $60,000, and that is the most that I suggest you invest in a franchise. {Of your own money}

The rest of your investment can come from a commercial loan, or even a line of credit, depending on what you need.

 

{When I work with prospective franchise owners, I encourage them to use less than 15% of their own money, if possible}

 

These days, most lenders want to see about a 20-30% of your own money invested in a franchise, so based on that, and the example I gave above, the total investment of a franchise that you should be targeting is around $200,000, total investment.

Total investment includes the upfront franchise fee, inventory, equipment, training expenses- including travel to and from franchise headquarters, and some working capital.

 

One more thing, and this is my opinion.

 

I don't feel that you should invest one dollar more than you are completely comfortable with. The amount you invest should not keep you up at night.

 

Now go out and find that franchise.

 

{The Franchise King, Joel Libava, is president of Franchise Selection Specialists Inc. Joel helps those interested in exploring franchise ownership find great opportunities that are a great match for them. He is frequently called on by the media for his honest insights on the world of franchising.

You can follow Joel on his award winning blog-The Franchise King Blog.}

 

* This hyperlink goes to a non-government website

Message Edited by StuartR on 07-20-2009 08:58 AM
Message Edited by StuartR on 12-01-2009 03:42 PM

About the Author:

FranchiseKing
Joel Libava

Guest Blogger

The Franchise King®, Joel Libava, is the author of Become a Franchise Owner! and recently launched Franchise Business University.