Conduct Financial Analysis of a Franchise in 3 Simple Steps

financial analysis
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Want to own a franchise business? If yes, here’s how to conduct a financial analysis of a franchise in three simple steps.

Step 1: Liquiq/Illiquid Assets Estimation

Liquid Capital is a concept that franchisors frequently use, to the point that it’s easy to forget that it’s not a typical term for newcomers to the field. This term refers to the amount of money you have available immediately, most often in the context of your capacity to invest in something new, such as a franchise business. Liquid capital consists of funds in your checking and basic savings accounts, as well as any investments that you can immediately liquidate.

It excludes illiquid assets such as a person’s home, obligations such as a mortgage or school loans, and investment accounts to which the individual does not have immediate access (SEP, IRA and other retirement funds). When considering a large investment such as purchasing a franchise, it’s critical to understand the business’s liquidity. The Liquid Capital requirement is typically one of the first pieces of financial information you’ll give to prospective franchisees.

Step 2: Franchise Cost Estimation

When you Google “franchise cost,” what frequently comes up is the franchise fee, which can range from $1,000 to $80,000 or more. That is, however, the charge for joining the franchise system. The total cost of a franchise, and hence the amount of investment required, includes numerous other charges, such as buildout costs, equipment, furniture, professional services, and training.

It is critical to note that the initial investment may not cover all costs associated with starting and operating your firm but should serve as a reasonable benchmark. Many business models operate at a loss for months, if not years, before turning a profit, and you do not want to run out of capital as a franchisee, so you’ll want to set aside some additional dollars for any unforeseen expenses.

Step 3: Additional Accessibility Assistance

It can be extremely difficult for franchisees to secure sufficient finance to pay their launch fees and operating expenses, even more so during poor economic circumstances.

Fortunately, there are alternatives available to entrepreneurs looking for nonpersonal finance for their franchise firm; however, securing such cash might require considerable time and work. If you decide to seek external financing for your franchise business, you should first: Determine the amount of financing you require. Ascertain that you have a favorable credit rating. Additionally, ensure a business plan, including a pro forma franchise income statement and cash flow projection.

During the franchise discovery process, inquire about the franchisor’s financing, leasing, or referrals to third-party financing sources. Certain franchisors will finance a portion of the franchise fee. Additionally, get opinions from current franchisees with whom you interact regarding cash sources during your franchise due diligence process.

Finally, while conducting a financial analysis of a franchise brand, do not overlook alternative sources of financing, such as the franchise registry, friends and family, home equity, bank financing, and veteran and minority lending programmes.

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