Chapter 9

Money Matters

So now is the biggest question of them all, how much is this going to cost me and how do I get the money? And we know these are vital questions so we have gathered some information for you which we hope can give you an idea of how much this venture is going to cost you.

Franchise Businesses: Not every franchise is a high maintenance operation. Health & fitness franchises, retail stores, and even some chain restaurants are examples of low investment business opportunities that have a high potential for profit. Franchise owners also have the added backing of the parent company, which will provide the guidelines for keeping your franchise operation on the road to success. This includes things like how to get additional working capital, maintenance, how to maximize your profits, and grow your business. The parent company has a vested interest in the success of their franchise operations – making them as turn-key as possible in order to make the owners (and the parent company) as much money as possible in a given location.
-From Commerical Capital Training’s article "Best Business Ideas With Low Investment"

Commercial Capital Training provides us a Guide to Franchise Costs And Things To Consider before investing in a Franchise

  • Inventory and Equipment

  • Insurance

  • Build-Out Costs

  • Software Licensing

  • Financing

  • Rent

The Franchise Maven breaks down and provides more details on Equity Funding which might come in handy for you:

An article written by Dan Daszkowski, a Franchise Expert for About Money named “7 Common Costs to Open a Franchise” gives 7 costs you should look out for when thinking of opening a franchise:

  • Franchise Fee

  • Legal and Accounting Fees

  • Build-Out Costs

  • Inventory

  • Supplies

  • Working Capital

  • Travel and Living Expense while Training: Although the training itself should be covered by the franchise fee, the franchisee is usually responsible for the training-related associated travel and living expenses.

Jared Lewis, Demand Media, wrote the article “What Is a Franchise Asset Payment?” and he outlines what it is:

Having a franchise name provides you with an intangible asset. As an asset, the franchise name that you obtain can be listed among your expenses and included as part of your tax information. As a franchise owner, you may be required to pay various fees and expenses.

 

Intangible Assets:

The franchise you purchase becomes an intangible asset that goes on your business balance sheet and is recorded as a noncurrent asset, according to Reference for Business.

Fees:

Ranchise Prospector notes that franchise fees can run anywhere from $15,000 to $30,000, on average, but can be more or less in some instances. Other fees include equipment which can run $5,000 to $30,000, signage totaling anywhere from $2,000 to $7,000 and building improvements of $20,000 or more

Most franchises require an upfront franchise name fee, but also ongoing royalty fees to maintain an ongoing relationship with the franchise chain.

“For example, Forbes notes that opening a Jackson Hewitt Tax Preparation Service franchise require an upfront fee of $25,000 plus an additional 15 percent of all earnings made franchisee. The $25,000 fee is also required for Merry Maids cleaning service, with smaller royalty rate of 6 percent, by comparison, as of 2009.”

Requirements:

The initial franchise fee that you pay is usually a way for the franchisor to distinguish between those who are serious about the franchise opportunity and those who are not. The steeper the fee, the more likely that the company offering the franchise has stringent qualification requirements.

About Money’s article “How Much Does a Franchise Cost?” gives us a few things we need to evaluate some investments you might be getting yourself into:

1. Other Start-Up Investments

  • Costs for finding the right location:

  • Construction and Leasehold Improvements

  • Professional fees for civil and architectural drawings, etc.

  • Zoning compliance

  • Contractor fees

  • Demolition costs

  • Equipment

  • Furniture and Fixtures

  • Freight and sales tax

  • Décor packages and signage

  • System Security

  • Rent Deposits

  • Insurance

  • Landscaping

  • Real property and occupancy charges

2. Management and Staff Training and Salaries
3.Other Fees

  • Legal Fees and Accounting Fees

Other costs that you can plan on include, but are not limited to:

  • Computer Networking

  • Office Supplies and Forms

  • Insurance Deposits

  • Utility Deposits

  • Other Prepayments

  • Grand Opening Advertising

  • Miscellaneous, for all the things you did not expect

  • Investment Chart and Item 7 Notes

Rupert Barkoff, a well known and experienced franchise lawyer in Atlanta, Georgia, is a partner at Kilpatrick Stockton. Rupert offers this advice about franchise fees. “When comparison shopping, pay particular attention to what services you will receive for your franchise fee and what other necessary services have separate charges. The lowest, most appealing franchise fee may not be the best value.”

Now you know what needs to be paid…how to go about paying it?

Greg Mohr, The Financing Maven, in his YouTube video gives us two types of Funding:

DEBT Funding

EQUITY FUNDING

  • Borrowing from Friends and Family

  • Business Line of Credit (BLOC)

  • Small Business Administration (SBA)

  • Equipment Leasing

  • Home Equity Line of Credit (HELOC)

  • Investor (Partner or Family)

  • Retirement Funds

 

Franchise Financing Guide & The SBA Franchise Registry by Priyanka Prakash, a business analyst and writer at FitSmallBusiness.com, with a focus on small business finance.

What Do I Need to Qualify for a Bank Franchise Loan?

  • Credit Score

  • Down Payment

  • Experience

  • Experience

  • Collateral

 

Tip: Work With The Franchisor’s Preferred Lender

Loan Application: Resume & Business Plan

  • Resume: According to Skevofilax of Portal CFO, most banks prefer to see 3-5 years of relevant experience.

  • Business Plan: You can include relevant data from the FDD in your business plan

Franchise Financing And SBA Loan Guarantees

The Small Business Administration (SBA) is much more likely to guarantee a loan to a franchise than many other types of startups. The SBA doesn’t actually make loans. Instead, they guarantee loans made by financial institutions, such as banks. While the SBA doesn’t guarantee 100% of the value of the loan in the case of default, they usually guarantee 75% of 7(a) loans.

The downside to an SBA loan is that it has higher closing costs than a conventional loan.

The SBA Franchise Registry

The SBA Franchise Registry (compiled by a private organization FRANdata) lists the names of franchisors for which the SBA has an expedited application process.

“I can't stress enough the importance of aligning yourself with local professionals, whether it's a Small Business Development Center or your local SBA district office. These offices are staffed with professionals who look at business plans every day. Use them as an objective set of eyes.” (Steve Smits, associate administrator for the Office of Capital Access at the SBA in 2012 provided the following tip in an article written for Entrepreneur.com named “Tips for Finding a Franchise Loan”)

Eddy Goldberg writes about the The Costs Involved in Opening A Franchise:

Franchisors usually have minimum financial requirements before seriously considering a candidate:

  • Liquidity - Unless you're printing money, your franchise business will take time to turn a profit (your franchisor should be able to tell you how long). Franchisors know this and usually require new franchisees to have a minimum amount of liquidity in order to keep the business afloat during its first year or more, until your bottom line turns from red to black.

  • Net worth - Franchisors also usually set a minimum level of net worth before they consider someone a true candidate for their brand.

"E-2" is not only used in a game of Battleship or Bingo...but a E-2 Visa could be something for you!

The E-2 Investor Visa allows an individual to enter and work inside of the United States based on an investment he or she will be controlling, while inside the United States. This visa must generally be renewed every two years, but there is no limit to how many times one can renew. The investment must be "substantial.", Wikipedia

The E-2 Investor Visa allows an individual to enter and work inside of the United States based on an investment he or she will be controlling, while inside the United States. This visa must generally be renewed every two years, but there is no limit to how many times one can renew. The investment must be "substantial.", Wikipedia

A few things to keep in mind:

  • E2 visa lasts as long as the holder maintains the investment.

  • E2 visas are considered non-immigrant visas.

  • E2 visa holders may only work for themselves or the E visa enterprise.

  • E2 visas may be extended as long as the E visa enterprise is operating.

What is a E-2 Investor Visa? It allows foreign entrepreneurs to live and work in the U.S. through investment in a U.S. business. Learn more by watching Greg Mohr’s, The Franchise Maven , YouTube video “E2 EB5 Investor Visa” which he has created to not only tell you what it is but how to qualify and the alternatives.

Scott Legal, P.C. has provided a few more notes to ponder to see if the E-2 Visa may be perfect for you...

  • You Must Be National of A Treaty Country

  • You Must Have Invested or Be Actively in the Process of Investing

  • You Must Intend to Return to Your Home Country After Expiration

  • You Must Be in a Position to “Develop & Direct” the Business With Skills

There are 5 requirements, according to USCIS’s website, that you need to know if your thinking of the E-2 Investors Visa:

Requirement 1 - As a treaty investor, you must be coming to the United States to invest in a new or existing enterprise.
Requirement 2 - Your investment must be in a bona fide enterprise and may not be marginal.
Requirement 3 - You must be in possession of the funds you will invest and the funds must be committed to your business.
Requirement 4 - You must be able to provide the source of your funding.
Requirement 5 - You must be coming to the United States to develop and direct the enterprise.

H1Base's article on E-2 Investors Visa answers questions like:
What Countries Maintain Treaties of Navigation and Commerce with the United States for E2 Visa Purposes?
Argentina, Armenia, Australia, Austria, Bangladesh, Belgium, Bulgaria, Cameroon, Canada, Colombia, Costa Rica, Czech Republic, Democratic Republic of the Congo, Ecuador, Egypt, Ethiopia, Finland, France, Georgia, Germany, Grenada, Honduras, Ireland, Italy, Jamaica, Japan, Kazakhstan, Korea, Kyrgyzstan, Liberia, Luxembourg, Mexico, Moldova, Mongolia, Morocco, Netherlands, Norway, Oman, Pakistan, Panama, Paraguay, Philippines, Poland, Republic of Congo, Romania, Senegal, Slovak Republic, Spain, Sri Lanka, Suriname, Sweden, Switzerland, Thailand, Togo, Trinidad & Tobago, Tunisia, Turkey, Ukraine, United Kingdom, and Yugoslavia.

Who typically uses the E2 Investor Visa?

- People who want to purchase a franchise or small business in the USA
- People who want to retire in America.
- Real estate investors

Who is covered by the E-2 Investors visa?

The E2 visa also covers the investor's spouse and children under age 21. But E2 visa dependent children loose their E visa status when they turn 21 years of age. At that time they need to find another status.

Legal Services Incorporated outlines a few additional questions and answers to some important questions when it comes to the E-2 Visa:

  1. Does an E-2 Visa lead to a Green Card?

    Answer: No, It is not a green card and it does not lead to one.

  2. Can I buy real-estate and apply for an E-2 visa? Does a real-estate investment qualify for an E-2 visa?

    Answer: No

  3. Do I have to hire U.S. workers right away to obtain an E-2 Visa?

    Answer: No, You will ultimately have to hire U.S. workers but this is not required in year 1 or year 2 (or even year 3)

  4. Do I have to spend money before the E-2 visa gets approved and what happens if the E-2 visa is not approved?

    Answer: No, The E-2 visa is for investors who are at the final stages of starting a business and who are ready to open the doors.

  5. Can I use a home office for an E-2 visa or do I have to rent office space?

    Answer: Generally speaking, as a rule a home office could jeopardize an application as a Consular officer may question the seriousness of the business.

  6. What can be included in my E-2 investment amount?

    Answer: Can include: legal fees, lease payments, equipment, furniture, website set-up, staff, inventory, working capital, value of any intellectual property and you may also donate property (as long as you have proof of payment)

If the FDD was like a box of chocolates, you’d kind of know what your going to get…

Mark Siebert’s article, for Enrepreneur.com, “How to Read a Franchise Disclosure Document” outlines 23 of the items in that pesky FDD:

And while the quality and contents of these documents vary, each FDD is required to contain the following sections in this order:

  • The Franchisor and Any Parents, Predecessors, and Affiliates

  • Business Experience

  • Litigation

  • Bankruptcy

  • Initial Fees

  • Other Fees

  • Estimated Initial Investment

  • Restrictions on Sources of Products and Services

  • Franchisee’s Obligations

  • Financing

  • Franchisor’s Assistance, Advertising, Computer Systems, and Training

  • Territory

  • Trademarks

  • Patents, Copyrights, and Proprietary Information

  • Obligation to Participate in the Actual Operation of the Franchise Business

  • Restrictions on What the Franchisee May Sell

  • Renewal, Termination, Transfer, and Dispute Resolution

  • Public Figures

  • Financial Performance Representations

  • Outlets and Franchisee Information

  • Financial Statements

  • Contracts

  • Receipts

“I can't stress enough the importance of aligning yourself with local professionals, whether it's a Small Business Development Center or your local SBA district office. These offices are staffed with professionals who look at business plans every day. Use them as an objective set of eyes.” (Steve Smits, associate administrator for the Office of Capital Access at the SBA in 2012 provided the following tip in an article written for Entrepreneur.com named “Tips for Finding a Franchise Loan”)

Top Franchises You Can Launch for Less Than $50,000 from Entrepreneur.com gives tells us what to look out for in the fine print:

If costs are a priority in your franchise evaluation, pay particular attention to three sections of the Franchise Disclosure Document (FDD).

  • Initial Fees - Item 5 will also tell you whether the franchise fee must be paid in full or whether it can be paid on an installment basis, and what the payment terms are.

  • Other Fees - Item 6 outlines recurring and occasional fees, including royalties, which are required by almost all franchisors in return for their ongoing support.

  • Estimate Initial Investment - Item 7 gives a range of how much it likely will cost to start the business: the franchise fee, plus additional costs such as real estate, equipment, supplies, business licenses and working capital.

So you have figured out how your going to pay….so what are you paying for? Here is some useful information you can use

The Echo Motel’s Blog sheds some light on the question: Determining The Franchise Cost That Best Suites Your Needs

The following is a short break-down of just a few business models ranging from highest franchise cost to the lowest. The first is:

  • Fast Food Franchises: consider this, the typical fast food chain restaurant will cost on average between $80,000 to $100,000 initially.

  • Typical Restaurant: seeing a positive ROI averages between 7-10 years, while research as been done showing that the average business only remains open for 3-5 years.

  • Department Stores: Staff costs, utility costs, and business expenses can reach undetermined heights in which even the greatest of department stores have been unable to maintain.

  • Virtual Business: Taking into consideration an extremely low franchise cost (averaging between $2,000 to $20,000 depending on the type of top-tier business), the unlimited reach in attracting customers and building a loyal following to your franchise brand is extremely powerful.

Below, you'll find the top 4 low cost Franchises in 2015 from Entrepreneur 's Top Low-Cost Franchises,

Review the full list of 97 business that can each be started for less than $50K here: Top Low-Cost Franchises

The most important cost factor to consider is the actual physical time you will be devoting to building that particular franchise.

An article written by Hayley Peterson, senior correspondent for Business Insider covering restaurants and consumer companies, outlines how much some of the big name restaurants cost to Franchise so you can get some idea if your interested in opening one of them:

“Owning a fast food franchise can be an incredibly lucrative business, but it requires a lot cash. On top of initial investments that can exceed $1 million, most chains charge monthly fees that can cost up to 12% of gross sales.”

Taco Bell: $1.2 to $2.5 Million

Minimum net worth: $1.5 million

Minimum liquid assets: $750,000

Franchise fee: $45,000

Royalty fee: 5.5% of gross sales

Average sales per unit in 2013: $1.4 million

Wendy’s: $2 to $3.5 Million

Minimum net worth: $5 million for new multi-unit franchisees or franchisee groups

Minimum liquid assets: $2 million

Franchise fee: $40,000 per restaurant

Royalty fee: 4% of gross sales

Advertising fee: 4% of gross sales

Average sales per unit in 2013: $1.5 million

KFC: $1.3 to 2.5 Million *According to FranchiseDirect.com

Minimum net worth: $1.5 million

Minimum liquid assets: $750,000

Franchise fee: $45,000

Service fee: 4% of gross sales

Advertising fee: 5% of gross sales

Average sales per unit in 2013: $942,000

 

McDonalds: $955, 708 to 2.3 Million

Minimum liquid assets: $750,000

Franchise fee: $45,000

Service fee: 4% of gross sales

Average sales per unit in 2013: $2.5 million

Pizza Hut: $295,000 to $422,000

Minimum net worth: $700,000

Minimum liquid assets: $350,000

Franchise fee: $25,000

Service fee: 6% of gross sales

Advertising fee: 2.5% to 3% of gross sales

Average sales per unit in 2013: $861,000

Subway: $116,000 to $262,850

Minimum net worth: 80,000 to 310,000

Minimum liquid assets: $30,000 to 90,000

Franchise fee: $15,000

Royalty fee: 8% of gross sales

Advertising fee: 4.5% of gross sales

Average sales per unit in 2013: $490,000

Visiting Angels: Senior Care

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Weed Man: Lawn Care 

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Franchise Maven


4425 Burke Rd,

Flatonia, TX 78941

Phone. 361-772-6401

Email. greg@franchisemaven.com