Learning the Financial Aspects of Franchising
For many of us, undertaking a new franchise is a major life change. And when it comes to setting off you should be aware of and learn some important financial concepts prior to launching ahead.
Understand your working capital needs to get the business profitable. You need to financially have a grasp of the total cost beyond line items. Examine the amount of working capital you have and what it will take to break even. If it takes longer to break even because of low working capital, your initial investment is going to be considerably higher. Partnering with an experienced business broker can help you to research this thoroughly. The franchisor should have an idea as to when the typical break-even point will come. Franchisors usually will explain that a new franchisee will require additional funds for those first few months. In the event that they are unable to supply an answer, talk with other franchisees to get a sound understanding of how much capital you need to get you through to profitability. You should ask this during your due diligence period, and your business broker can seek out other franchisees to gain a better idea of the financial performance of individual locations.
Working with Banks
Experts are quick to point out that if you’re going to the bank for a loan, you will find out fast that some of them really don’t understand what you’re trying to do.
Banks initially examine the borrower’s background and financial standing, and they quickly see that a new franchise isn’t something you’ve tackled in the past. As a result, they just might deny your loan. The lenders that don’t typically work with franchising aren’t in a position to be aware of the franchisor/franchisee relationship. While they plug in numbers, they may not see that there’s more to this. That’s why a franchisee financing their investment for the first time needs to find a lender that understands the franchising model. Your business broker will have relationships with local lenders in Sacramento that will be able to help with a loan for your franchise. Avoid this major headache and work with a bank that understands franchising.
This is Earnings Before Interest, Taxes, Depreciation and Amortization, which is a key barometer of a company’s financial performance. It’s calculated as revenue minus expenses (excluding tax, interest, depreciation and amortization). That’s net income with interest, taxes, depreciation, and amortization added back in. EBIDTA is used to analyze profitability between companies and industries, as it eliminates the effects of financing and accounting decisions. A company’s EBIDTA at 10 percent is good, but the higher, the better. You and your business broker will be looking at this when you consider a franchise purchase.
Why not get some advice from an expert?
You can ask questions and be better prepared.
Your franchise will be that much farther ahead. Andrew Rogerson is happy to help. He can prepare an analysis on similar businesses competitive in your space.
To discuss franchise financing issues and to explore franchise opportunities in the Sacramento area and throughout California, please visit our website Services and choose from the drop down menu the information you’d like.
For more immediate help, please send an email to Andrew or call him at (916) 570-2674.