Franchise Tip #11: Have enough working capital in the initial stages of operation. It may take some time for marketing efforts to payoff and for customers to familiarize themselves with your business and location.
Franchisees can be so preoccupied with securing financing for their new venture that they overlook the need for ample working capital to keep operations going while the business finds its customers.
The amount of reserve cash necessary to have when you open your doors varies with the type of business.
Alex Howson is a multiple-unit Sport Clips franchisee in Chicago and St. Louis. When he talks to potential franchisees who are considering investing in the chain, he offers several pieces of advice. One is to think long-term. Two is to have at least $70,000 in working capital to see the business through the first few months before it establishes a client base.
“This is a business where you don’t just open your door and customers flock in. It takes time to get your brand out,” Howson said. “What I tell prospective Sport Clips franchisees is to be prepared with $250,000 to open the store and get it to break even.”
“It’s hard work and you get out of it what you put into it. I see a lot franchisees who come in and think it’s turn-key.”
Food service franchisees offer the same advice, especially if it’s a new brand being introduced to a territory.
David Pierre recently became a franchise partner with Orange Leaf Frozen Yogurt in New England after running restaurants for others for a number of years.
“The initial operating capital is an important cushion between opening and the time it takes for marketing to kick in and build a customer base,” he said.
“Have $100,000 in working capital so you can be very comfortable in building your business. You have to work really, really hard. Don’t think you’re going to go into this business and open your doors and people are going to come pouring in.”
In addition to having adequate operating capital in the beginning, Randy Herman also advises franchisees to reinvest in their business once it does start to turn a profit. Herman and his wife are multiple operators of Chem-Dry franchises in Texas.
With multiple licenses, Herman estimates that his investment costs for each new franchise are between $20,000 and $35,000. But he has built the businesses by having some capital in the beginning.
“I’ve seen over the years some guys just hit home runs out of the gate and others struggle,” he said of some other franchisees starting a new unit. “It’s about following the program and having some capital. I used that money for marketing. I continued to eat beans and rice and didn’t buy the coolest stereo like my friends and reinvested that money back into my business. I continued to be frugal and turn as much money as I could into marketing so I could get that phone to ring.”