Franchising on a Budget: It May Be Easier Than You Think to Get into Your Own Business
Always dreamed of owning your own business but think you can’t afford a franchise? Think again.
A limited budget doesn’t mean you have to give up on your dream to become a business owner. It’s a matter of selecting the franchise opportunity that’s right for you and then working through the many options available for getting started and taking control of your future.
The good news is that right now, buying a franchise is more affordable than ever because of three factors – the amazing diversity of franchise opportunities, the record-low interest rates currently on offer and the keenness of franchisors to keep growing despite uncertain times.
Borrowing costs are at a record low
Let’s say you’re considering a retail franchise for $300,000. Most franchises require you to put some of your own money in or at least have at least part of the cost in liquid assets – that is, cash or assets you can easily sell for cash. So, let’s also say you have $50,000 of your own and need to borrow the rest.
A quick survey of loan comparison websites shows that you could possibly get an unsecured five-year fixed business loan for that amount for as little as 4% per annum or just over $1,000 per week, but if you have equity in your home and can secure the loan over that equity and extend the loan term over, say, 20 years, you could slash your interest to around 2% per annum or under $300 per week.
Don’t have fifty grand? Don’t stop reading!
The thing to remember is that probably the most important consideration for a franchisor in selecting a franchisee is finding the right person, a person who has the drive and ability to build a strong business. A prospective franchisee may have wads of cash but if they’re not the right person, they’re not going to be successful and may end up damaging the franchise as a whole.
If you’ve got your eye on a franchise and think you’re the right person, here are some strategies for getting in for less than you may have thought.
- Start small, think big
I have several clients in service franchises who offer a range of entry options, starting from as little as $4,000. They’ve told me that it’s an increasingly common approach for people getting into their own businesses to start with a lower-cost option, build it up and then either sell it and move on to a bigger franchise or use their cashflow to purchase multiple franchise units. For this approach to be successful, you have to be disciplined and work hard but it is possible to do very well out of a small initial investment.
- Ask the franchisor if they provide vendor finance or a guaranteed income
Many franchises will lower the barriers to entry for the right people. It always pays before you start approaching banks for a loan to check whether franchisors offer finance or the ability to put a small deposit down and pay off the initial franchising costs as your business grows. If you’re currently employed and can’t afford to lose your regular income once you purchase a franchise, look for franchises that offer a guaranteed income for the first few months after startup.
- Find a franchise using the Chick-fil-A model
If you’ve never heard of Chick-fil-A, it’s because they don’t yet have any franchises in Australia and New Zealand, but this fast-food chicken sandwich restaurant is now the third-largest chain in the United States after McDonald’s and Starbucks in terms of sales. The difference between Chick-fil-A and other franchises is that it costs franchisees only $10,000 all up to buy in. The franchisor pays for all startup costs, including real estate, restaurant fitout and equipment. For that reason, Chick-fil-A gets more than 20,000 inquiries for franchises every year, but only accepts between 75 and 80 new franchisees. The catch is franchisees must pay ongoing royalties of 15% of sales plus 50% of the pretax profit after royalties. So although the average sales of $US4.6 million for each of Chick-fil-A’s restaurants are three times more than KFC’s restaurants, franchisees take home an average of only US$200,000 of that. Not that that’s anything to sneeze at. Although you can’t buy a Chick-fil-A franchise here, you can buy other franchises which offer low upfront costs but high ongoing costs. A classic is Kumon Education Centres which charge the lowest initial franchise fee in the business – just $1000 – but the trade-off is the 40 – 50% fee on enrolments.
- Find out how much love the banks have for the franchise
Bankers recognise that the risk involved in lending to people buying into established franchise models is low, so for what they call accredited franchises, they may be willing to lend to you up to 70% of the purchase price secured only against the business, not your home or other asset.
- Find a business partner
Getting into a franchise with a partner can bring more business expertise and support as well as cash into the business, but my advice is to be very careful who you get into bed with and be sure to document each partners’ roles, responsibilities and share of the rewards in a good shareholders’ agreement.
- Find an investor
An investor is someone who contributes capital to a business but doesn’t normally get involved in its day-to-day operation, although they will expect to play a part in any major decisions and, of course, get a share in the business and a return on their investment. As with a business partner, it is essential for the avoidance of potential conflict to document the details in an investors’ or shareholders’ agreement, even if the investor is a family member or friend.
- Be prepared to compare and negotiate on costs
I have found over many years in franchising that the notion that you can’t negotiate with franchisors is a myth. Franchisors, like all business people, must be pragmatic in order to survive and thrive. If you’re the right person in the right place and time, who knows what kind of deal you could make? You don’t get if you don’t ask, and you’ll never lose anything by asking.
Robin La Pere is a franchise consultant with more than 20 years’ experience as a franchise manager, CEO and owner as well as a consultant, coach and speaker on franchising. Based in Auckland, New Zealand, he works with clients throughout Australasia and internationally. He is a specialist in business model development, strategic planning, process improvement, innovation and franchise recruitment marketing.