When searching for a franchise, the first thing on a consumer’s mind is, “how much is it going to cost?”
Here are some franchise financial terms that you will want to be aware of before you purchase a franchise:
Franchise Fee: This is the fee to pay the franchise company to obtain the rights to own the franchise. Some franchisors will accept a credit card payment but most will want to have liquid capital in the form of a certified / or wired funds. This is found in Item 5 of the Franchise Disclosure Document, also known as the FDD.
Other Fees: These fees would be the monthly costs that you pay the franchisor for their support. They typically include: the royalty payment, supplies, equipment, advertising, insurance, transfer, renewal and training fees and monthly point of sale fees. This fee is found in Item 6 in the FDD.
Total Investment: This investment amount consists of all the costs that you have to pay to open the franchise. This cost consist of the franchise fee, equipment, operating capital, inventory, equipment, real estate, licenses, permits, initial advertising, training, software, supplies, and anything else required to get your specific franchise open for business.
The Total Investment figure is expressed as a range and will have a “low and high” targets, which usually depend on the real estate costs. If you were to obtain an SBA 7A loan, you would need to put 20-30% down in liquid capital of your own and the bank will fund the remaining amount. This fee is found in Item 7 of the FDD.
Cash Investment: Typically, you will need to know how much cash you will need to pay for the franchise investment. Items such as: the franchise fee, the security deposit for the leased property, build-out costs if you are renting a space, training costs and miscellaneous costs. The latter costs include: Point of Sale system, marketing costs and labor costs. All of which you cannot use a credit card to purchase.
Liquid Capital: This term is used interchangeably with cash investment. The franchisor will want to know how much convertible capital you have to put towards your business. Liquid cash consists of: cash in your checking account, 401K and money in a money market fund.
Initial Investment: This fee is the total amount needed to start the business. It includes: your franchise fee, training costs, insurance, loan costs and other initial fees to start the business.
As you can see, several of the fees overlap one another and may be used interchangeably. By enlisting the aid of a franchise consultant, you will be able to quickly understand the meaning of the various financial terms.
