Prepared by: THE COMPLETE GUIDE to Starting and Running Your Own Franchise

Prepared by: THE COMPLETE GUIDE to Starting and Running Your Own Franchise

Starting your own business is a big undertaking. For those with the entrepreneurial spirit, it is the best way to express your own ideas and realize your dream of working for yourself. But it also comes with quite a few risks. Over half of all new businesses fail in the first five years. Why? The two major reasons are lack of knowledge regarding pricing, taxes, and financing and lack of managerial experience. As a potential new business owner, how can you ensure that you won t be among the 56% of businesses that fail in the first five years? How do you gain the years of experience and knowledge that will help you succeed when you don t actually have years of experience and knowledge? One of the ways to overcome this obstacle is to start a franchise. A franchise immediately gives you the backing of a major brand and takes much of the risk out of starting your own business. Whichever franchise you choose already has a proven, successful business model in place. In addition to that, there is generally massive support offered from the parent company regarding how to run your business. HOW MUCH MONEY DOES IT TAKE TO OPEN A FRANCHISE? One of the biggest questions when looking to open a franchise business is, How much money does it take? The answer depends on a number of factors: Total opening costs (franchise fee, development fees, construction cost, legal fees, training, etc). Whether you plan to pay for the entire project with cash or finance a portion of it. A franchise that costs $250K to open is much different than a franchise that cost $4M to open. If you decide to finance a large portion of your franchise, you have to consider the time it will take to pay off the loan and what you will pay in interest over that period. On the other hand, if you are cashing out on a 401K or other investment funds, the loss of income over time is something to consider as well. Other considerations that will affect your costs include: Are you leasing or purchasing equipment? Will you own or lease the space of your franchise? How strong is the brand that you are franchising? What does your credit look like? What does your personal financials look like? Is there land ownership? Equity injection requirements range from as little as 10% to as high at 35% or more. However, most lenders want to see that the franchise owner can come up with at least 25% cash of the total investment of the franchise they are trying to buy. For example, if the total investment for a franchise is $250K, a franchise buyer would need to be able to come up with at least $62,500 (25% equity injection) out of pocket in order to get financing for the remainder of the project investment. LIQUIDITY VS. NET WORTH When you are looking at a franchise it is important to understand your liquidity position versus your net worth. Liquidity is cash on hand. That is what is needed for the equity injection that banks require. Liquidity includes what is in your checking and/or savings accounts as well as stocks, bonds, and CD s. Some lenders even include retirement accounts (401K rollover program 1

are now available) as well as equity in your real estate (equity line of credit). Net worth is your Assets minus your Liabilities. Assets are everything that you own that has value (houses, cars, property, bank and investment accounts, jewelry, etc). Liabilities are monies that you owe (loans, credit card debt, etc.). Both are important, but in franchising liquidity is what most lenders look at to make sure that you have skin in the game. However, a good balance of both is usually considered. WAYS TO BECOME LIQUID ITS EASIER THAN YOU THINK What if you don t have the liquid assets you need to invest in the franchise of your dreams? There are several practical, and fairly easy, solutions to this problem. 1. Borrow from your 401K. This is a fast and easy way to get cash. Generally it won t generate a ping on your credit report and therefore won t affect your credit rating. Often you can make a loan request online, and can often have cash in hand in a few days. For most 401K plans, you can repay it conveniently through payroll deductions using after-tax dollars. Generally this is a very low cost option. Sometimes there will be a small administrative or loan origination fee, but there are no major penalties for borrowing against your 401K. And while you may lose potential earnings from those investments during the period of the loan, you also avoid any losses should the market take a down turn during that time. 2. Take out a small business loan. SBA loans are a great option for a number of reasons. a. A bank is more likely to loan you money if you are opening a franchise because it is backed by a brand with a tried and true business model. Banks prefer to loan money to a business that has a long track record of consistent cash flow in a variety of economic climates. b. SBA loans are partially guaranteed by the government and therefore less risky. This makes it a better proposition for both you and the banker. c. SBA loans have interest maximums. These maximums are tied to the prime rate, which means they can fluctuate, but only up to a certain amount. 3. Tap into specialized benefits. There are several financing programs for specialized groups, such as minorities or military personnel. Veterans, for example, can take advantage of a program called Patriot Express, which offers low interest SBA loans to up to $500,000 to active duty military members trying to transition back to civilian life. These loans are also available to spouses and survivors of veterans. They come with SBA s lowest interest rates. 4. Find a partner. If you fall a bit short of the necessary cash to invest in a franchise, find someone willing to make up the difference. Choose someone who you trust and can work with successfully. 2

Also, be sure to establish guidelines for the partnership early. Will it be a silent partnership or will he or she have a more active say in the day-today operations? Make sure that whatever partnership you create works for both of you. GETTING STARTED: WHICH TYPE OF FRANCHISE IS RIGHT FOR YOU? PASSION Choose something that will allow you to pursue your passion. That doesn t necessarily mean that you have to have a passion for cookies in order to run a cookie franchise. You could just be passionate about delicious food in general, or about creating food that makes people smile. Maybe you love certain aspects of the business such as training and nurturing employees or providing a service to the community. LOCATION Consider your location. Be careful about opening a franchise that already has locations in your city. Not only will you have to compete for customers, but often other franchise owners will snap up more locations in their area because it is an easy way for them to expand. You don t want to be competing with those guys. It is better to start a franchise that hasn t opened in your area. For example, if you live in the Midwest and you know that there are no Pretzelmaker franchises in in the region, it would be a good franchise to consider. You will have no competition from other stores or other franchise owners. Your crew needs to leave a positive and memorable impression on your customers if you want your store to become everyone s favorite destination. This means hiring staff members who understand the importance of good customer service, have a good work ethic, and are just generally easy to work with and nice. Sounds simple, but sometimes it is hard to find people who have all of those characteristics. Keeping Up: Ways to keep things running smoothly Follow the plan. The franchise you choose is successful for a reason. The mother company has worked out all the kinks for you why mess with a winning formula? Learn what sets your company apart from others and make sure that your franchise keeps that as an integral part of how you do business. Look to the future and plan for growth. Don t set things up to only be able to handle what you are doing right now. You must have a bigger goal than that of just opening up a store. You should be an entrepreneur who looks at the big picture. This takes a lot of commitment and vision. But by thinking ahead in this way you will be prepared to make the changes and adjustments that are necessary when your business starts to grow. When considering location, you should also know your data. Do your research when it comes to demographics and the real estate picture such as construction costs and possible co-tenants. Jumping in: Some tips for hiring, managing, and tapping in to resources Your employees can be the key to your success. Make sure you are getting the right people for the right job. Franchises with great employees do better that s a fact. 3

For more information on great franchising opportunities with excellent resources and support, contact Global Franchise Group today. franchiseinfo@gfgmanagement.com 1346 Oakbrook Drive, Suite 170, Norcross, GA 30093 770.514.4500 800.524.6444 franchiseinfo@gfgmanagement.com This information is not intended as an offer to sell, or the solicitation of an offer to buy, a franchise. It is for information purposes only. Currently, the following states regulate the offer and sale of franchises: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. If you are a resident of or want to locate a franchise in one of these states, we will not offer you a franchise unless and until we have complied with applicable pre-sale registration and disclosure requirements in your state. Franchise offerings are made by Franchise Disclosure Document only.