One of the biggest questions that comes up when looking to open a franchise business is, “How much money does it take”? Unfortunately, it depends. It depends on the total cost of opening (franchise fee, development fees, construction cost, legal fees, training, etc) a franchise. It also depends on if 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 $4MM to open. I have been involved in both scenarios over my franchise career. I would say that most people in both cases choose to finance as much as they can and leverage the banks money.
The equity injection or cash out of pocket is really the money it takes to open up a franchise business. The range on this varies as well depends on several things.
- 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?
I’ve seen equity injection requirements range from as little as 10% and go as high at 35% or better. However, most lenders I’ve come across 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 illustration purposes, 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
Just one last point. When you are looking at a franchise it is important to understand your liquidity position versus your net worth and what is needed. Liquidity is cash on hand and 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 my even include retirements account (401K rollover program 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 I would say that in franchising, most lenders want to make sure that you have “skin in the game” but a good balance of both are considered. Anyway, I hope this helps you understand the “money” question in franchising and good luck finding that franchise business.
For more info on Global Franchise Group franchise opportunities, call us at 877-639-2361
You can also view our franchise brands’ sites below: