Can You Afford to Buy a Business?

By Kerry CroccoMay 17, 2019

The prospects of owning a business can be quite promising and exciting. You’ll be your own boss. You’ll run the show.

Can you afford a franchise?

Buying a business isn’t cheap. How are you going to fund that big purchase? What do you need to consider to determine whether you can afford to buy a franchise?

Understand the Initial Costs

Depending on the franchise, the initial investment can range from $10k to $1.5 million+. If it's a retail business, real estate costs will have a huge bearing on your startup costs.

To get a complete picture of the startup costs for any franchise business, you will have to look at the FDD (Franchise Disclosure Document) for each, which should be availed to you once you show initial interest. Pay particular attention to Item 5, which is the franchise/initial fee - you can expect this to set you back between $10k and $40k. Another FDD cost item to check out is Item 7 which tells you all other additional startup costs like inventory, insurance policy, equipment, real estate, and so forth.

Don’t Forget the Cost of Hiring External Help

When buying a business, especially a franchise, it pays to work with professionals. You’ll probably have to hire a franchise consultant, coach, attorney or an accounting consultant. Ensure to include these professional services costs in your expense planning.

Assess your Financial Position - How Much Can You Afford?

At this point, you should have a clearer idea of how much the business/franchise will cost you, including all extra costs. The next sensible step would be to determine how much you can actually afford. This is where you need to take a long, hard look at your financial situation and evaluate your position.

Start off by calculating your net worth, which is basically the difference between all your assets and all your liabilities. Next, consider the value of liquid assets and cash you can earmark for the initial investment. It is crucial that the investment you are willing to make can be comfortably accommodated by your net worth.

While you can get external financing (more on this ahead), it is recommended that you put down at least 20-25% of the total investment for the purchase. For instance, if the total investment you can make is $100,000, you should not think of a buying a franchise over $400,000. That would be taken as a high-capital franchise for your investment budget.

Getting Franchise Business Financing

What are your loan options for purchasing a business or a franchise? There are plenty of financing options, but all will depend on your credit history and if the franchisor will vouch for you. These loan options include financing through the franchisor, home equity loans, Small Business Administration (SBA) loans, Rollover for Business Startups (ROBS), or a regular bank-offered small business loan.

To make the loan application process easy and hassle-free, make sure to have your copy of credit report, bank statements, copies of tax returns, and detailed bank account information handy. Again, the franchise you choose to buy into will have bearing on whether you will qualify the loan or not. An established reputable franchise with a recognizable name will help you get a loan with fewer questions asked.

Reference List

https://www.business.com/articles/can-you-afford-to-buy-a-franchise/
https://www.guidantfinancial.com/blog/video-small-business-success-how-much-can-you-afford/

About the Author - Kerry Crocco

Marketing Coordinator for Franchise Solutions and Franchise.com; conduct email marketing campaigns, web page management and trade show coordination. Mother of two, wife and Young Living Essential Oils representative.
Categorized Under: