This lesson is part of our free Franchise 101 course.
When you’re deciding what franchise to get involved with, one of the most important considerations is your budget. There’s no point getting excited about what a gym franchise would look like if you can’t afford the location and equipment, never mind the franchise fees. That’s why knowing what you can afford is so important.
Working Out Your Budget
Start by working out what your potential sources of finance are and how much they can provide. Do you have money set aside? Are there loans you can take out, and how much debt are you willing to risk getting into on those loans? Bear in mind what your collateral would be and what impact it could have on you to lose it. Betting the family home on your business skills isn’t a risk-free enterprise.
If you’re going to go for a Small Business Administration (SBA) loan, then keep in mind that you’ll have to make a down payment of 10-20% of the loan amount and also put up some collateral. The finances are more complicated than “I got a loan this big, so that’s what I can spend.”
You need to know how much you’ll have available not just for franchising fees but to get the business started.
Working Out the Costs
Now look at the costs of the franchises you’re considering.
The easiest one to identify is the franchise fee. This is the amount that you’ll pay the company behind the franchise for the right to use its brand, and for the support that comes with it. It’s your buy-in to that specific enterprise.
Then look at the costs for getting this sort of business up and running. These vary hugely. A simple decorating business will just need a vehicle, a few tools, and money to buy paint. A gym needs a large building, lots of specialist equipment, and all the staff’s training and wages. The franchise might provide guidance on these costs, but it’s worth researching more widely, looking at estimates on franchise analysis sites, as well as organizations and discussion boards covering that industry.
Dreams You Can Afford
You’ll end up with a range of possible costs. To be on the safe side, assume that you’ll have to spend the upper end of that estimate, then add another 10% for a safety buffer, in case there are details people have missed. If you estimate too low, you could end up stuck with commitments you can’t afford.
Compare these estimates with your budget, and then cut out the options you can’t afford. It can be dispiriting to limit your dreams in this way, but you’ll be better off in the long run if you limit yourself now to franchises you can afford. This way, you’re not wasting time and taking risks on dreams that will never come true. You’re planning for the dreams that will work for you.