How Much Should You Invest In A Franchise?

                                                                                                                                            

As I stated in the previous post, "If you don't know where you are, how can you expect to get where your going?"

Let's assume that you finished up your net worth statement, and are ready to figure out the investment amount you should budget for your own franchise business. Here are my thoughts on budget...

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

First off, you need to know one very important thing about investing in a franchise of your own;

Investing in a franchise is not like investing in the stock market. For example, when you buy an individual stock, the more shares you purchase up front, the bigger the potential payoff. Of course, the more shares you buy, the more money you can lose, too.

When you buy a franchise, in every case except one, the amount you invest does not have a direct bearing on what your potential income will be. In other words, there is no automatic correlation between what you invest in a start-up franchise, and what you can make. Most of the folks that I share this with, never knew this fact. They figured that the more you invest, the more your potential income will be.

Lets say you have always had your eye on a major food franchise like Sonic. Here is some information on investment amounts, right from the Sonic website;

• The franchise fee is $45,000, with a total initial investment ranging from $710,000 to $3 million.

If you are not familiar with Sonic, it is a cool "drive-in" style fast food restaurant, much like the drive in's of the 1950's. Nostalgic.

Do you think that an investment of $1,000,000 + in a Sonic will give you a 6-figure income? It may, but the investment amount really has nothing to do with it. The amount you can make in any franchise has to do with several factors;

• Do your skills match what's needed to successfully own and manage the franchise opportunity that are considering?
• Is the opportunity right for your geographical area?
• Is it a business that can really grow, or are you buying yourself a job?
• Is it a fad? Or is it a hot franchise?
• Can your sales revenue be high enough to support your income goals?

So keeping those thoughts in mind, here is a good rule of thumb for how much you should invest in a franchise of your own.

Don't invest more than 15% of your own money in a start-up franchise. What I mean by "your own money" is the amount you'll be writing a check for, before a business loan. Here is an example;

Let's say you did your net worth statement, and your net worth is $400,000. Fifteen percent of of $400,000 is $60,000, and that is the most that I suggest you invest into a franchise. The rest of your investment will come from a commercial loan, or even a line of credit, depending on what you need. {When I work with prospective franchise owners, I encourage them to use less than 15% of their own money, if possible}

These days, most lenders want to see about a 20-30% of your own money invested in a franchise, so based on that, and the example I gave above, the total investment of a franchise that you should be targeting is around $150,000, total investment.

Total investment includes the upfront franchise fee, inventory, equipment, training expenses- including travel to and from franchise headquarters, and some working capital.

If you have any questions about the above example, please go here.

One more thing, and this is my opinion.

I don't feel that you should invest one dollar more than you are completely comfortable with. The amount you invest should not keep you up at night.

Now go out and find that franchise.

Comments

[The Franchise King]

Thank you so much, Michael.

I like your restaurant website. It looks like you can help restaurant owners with a few interesting tools.

Here it is, readers;

http://rejuvenateyourrestaurant.com/

The Franchise King
Joel Libava

[Michael Hartzell]

Joel,

I like your style. You get to a point, keep it simple, make it relevant, present it well..... I will be putting you on my reference / resource list. I will be back!

Michael Hartzell