Buy a Franchise with No Money

Being under capitalized is basically not having enough money to run your business and live a life. And buying a franchise with no money is a formula for financial disaster.

If you’re going to buy a franchise, above all, make sure you have your finances under control. Not just your household finances, but the projected financial needs of your business.

To be smart (and to reduce risk) you really should be out of personal debt, have at least 6-12 months of LIVING expenses saved and have 6 months of business operating expenses set aside.

I know, that’s a lot to ask. But think about it, most businesses FAIL because of cash problems. By far, the biggest reason for businesses going bust is lack of cash to keep the business moving ahead. Don’t be under capitalized. Here are two things you must have completed:

Get your Personal Finances in Order.

Digging out of debt, reduce expenses, and start aggressively saving.

Dig out of Debt. Pay off credit cards. Pay off car notes, student loans, even second mortgages. Plus anything else that “burdens” your budget.

Reduce Expenses: Look for leaks in the budget. Easy to trim categories are dining out, entertainment, and groceries.

Aggressively Save: Open a savings and stash as much as you can away, now.

Get Accurate Franchise Projected Financials.

Research franchise financials, review Item 19 of the FDD, and develop a proforma with the help of a CPA.

Research Financials: Review Franchise Disclosure Document (FDD) and contact existing franchisees that are willing to validate start-up and operating expenses.

Review Item 19: In franchise FDD’s, there is a section that states Earnings Representations. Not all franchises disclose this item. The ones that do, provide a wealth of information for determining projected financials.

Develop a Proforma: A proforma is a future financial picture of a business. My forecasting potential revenues and expenses, you should be able to get a handle on the level of profits a business will provide.

Many potential franchise buyers falsely assume that by buying a business they will have immediate cash flow. Their assumptions are wrong, and in some cases, devastating. Make sure you have your finances in order and consider using the assistance of a franchise consultant who can assist you with researching a franchises financials.

Avoid This Mistake when Buying a Franchise

Starting a business can be overwhelming. The need for proper and detailed planning along with precise execution is critical for success. Overlooking the smallest detail could lead to time lost and financial crisis.
To lower the risk, some decide on purchasing a franchise. By providing proven systems, identifiable brand marks and validations with existing franchisees, a franchise business lowers most start up risks, but not all. The greatest risks come from buyers making mental mistakes prior to buying a franchise.


The biggest mistake someone could make when buying a franchise is rushing in too quickly. Jumping in without proper preparation (leaping before you look), is by far the greatest miscue you could make.

While it seems that your circumstances might pressure you to make a quick decision, such as, needing income or cash flow. It’s better to take a sober approach. Remember what you learned from your grandmother, “Haste makes waste.”

To avoid this blunder, you need to have a clear objective, set a plan of action, stick to the plan and seek guidance.

Clear Objective: Establish what you want from a business and when you want to achieve that objective.

Plan of Action: Simple project planning with milestones and target dates, assigning tasks and tracking results.

Stick to Plan: Staying the course and making corrections along the way. You need to keep working the plan for the plan to work.

Seek Guidance: Get expert help, a franchise consultant can assist you with identifying objectives, setting a plan and keeping you on track.

Financing a Start-Up Franchise

Wanting to start a franchise is easy. Just decide to “go for it” and make it happen. On the other hand, getting the financing to invest in a start-up franchise, for most, is the tricky part.
Here are three widely used methods to get start up funds in today’s markets:

Unsecured Lines of Credit
This method is commonly used by those with moderately high personal credit scores (usually 710 FICO or above) and are able to personally guarantee the loan. The credit is “unsecured” which means there is no down-payment or other collateral (such as real property) at risk in case of loan default. This type of credit may be a good option for those who have strong credit scores with current, verifiable income sources.

Retirement Funds Rollovers
Currently there are methods for utilizing 401(k) funds to fund business purchases, including franchises, and in some cases real estate. There are a number of vendors who can assist with this type of transaction. The tax and legal formalities are managed by these companies, for a fee. This alternative may be good for those who have large to substantial retirement account balances, but may have poor credit due to foreclosures or other personal situations.

Franchisor Financing
This method is when the franchisor holds a note for part of the initial start-up costs. Those franchisors who offer this usually have faith that their business model and believes that new franchisees into their system will be successful. This means that they will be paid back on their loan. Not all franchisors offer this type of financing, but those who do, are confident of their systems. Usually this type of funding is offered to buyers who have some capital to put toward the purchase (sometimes from one of the previous options) and have good personal credit.

Funding a start-up business is an art as much as science. In most cases, a combination these methods is needed. Using the expert assistance of a franchise consultant will help you determine what blend would work for you.

How to Determine if a Franchise is Profitable

Many things can determine franchise business profitability, but there are specific key performance indicators (KPIs) that can help give a more accurate picture of how well your franchise is doing in terms of showing a profit.

• Are your living costs being met? In other words, do you have enough money coming in from your franchise to keep a roof over your and your family's head, provide for the children's education, cover minor emergencies, and buy groceries, just to name a few. At the very least, this is how much money should be coming in over and above operating expenses.
• If you borrowed money for the franchise fee, are the payoff terms in line with the length of the franchise agreement? Or are you going to be paying for a 5-year franchise agreement for the next 20 years? If you are, then your debt to asset ratio is too high.
• Are you using franchise profit for personal expenses, in order to receive a tax break, or for any other reason? When you do this, the bottom line is that your business profits are not as high as they can or should be.
• Are you paying yourself enough, or are you paying yourself too much? Both situations create false profit figures.
• Are your cost and other margins accurate, or are they too wide or narrow? As with salaries, too much or too little will not give an accurate picture of franchise profitability.
• How are your expenses? Do you need to get them under control? Too many expenses can make a huge dent in profits. Look for ways to control cost without sacrificing customer service or satisfaction. And, whatever you do, don't try to cut corners by failing to adhere to guidelines and regulations.
• Do you have to be told that more sales mean more profits? Probably not. Look for ways to increase your sales at the same time you are figuring out how to cut expenses.
• Ready for a review? It's a very short, simple one. Keep your expenses low, make sure your margins are as accurate as possible, and increase your sales. By doing this, you will be able to get a clearer, more accurate picture of what your franchise profitability truly is.

Only a few people besides yourself need to know your franchise profitability, because it's really no one else's business except those who are directly involved in the franchise. However, this seeming lack of accountability is what makes it easy for you to "play around" with your figures. Don't do it; instead, hold yourself to an honest reckoning.

By contacting one of FranFinders expert franchise consultants, you can be referred to a competent franchise accountant that can review any franchise business profitability numbers.

Franchise Agreement Example

Franchises are different; therefore, franchise agreements must by necessity be different in scope and tone. However, there are certain provisions that are or should be included in most franchise agreements.

• Obligations of both franchisors and franchisees concerning business operations must be spelled out, in as complete detail as possible.
• The amount of training and operational support that the franchiser will be responsible for providing must be clearly stated. This information should also include the cost of the training and operational support.
• The territory in which you are allowed to operate your franchise must be plainly stated. In addition, any exclusion which may apply must also appear in this section.
• How long the franchise agreement will be in force must be included in the document. Renewal rights must also be stated.
• The amount of investment required by the franchisee must appear in the agreement.
• Guidelines and regulations concerning trademarks, patents and signs and the rights and responsibilities of the franchisee as pertaining to them must be included in the agreement, and written in such a manner that the franchisee will be able to follow them with minimal, if any, problems.
• Fee amounts, including franchise, royalty, and service fees for which the franchisee is responsible must be stated in the agreement.
• The responsibilities of both franchisee and franchisor where tax issues are concerned must be addressed. 
• Conditions and restrictions on the sale or transfer of the franchise must be clearly stated.
• Any advertising policies that must be adhered to by the franchisee should be plainly stated.
• How franchisee termination issues will be handled must be included in the agreement.
• Dispute settlement guidelines must be in the agreement. Further, the paragraphs addressing these must include how the company will settle disputes, how disputes concerning operating practices will be handled, dispute cancellations, and who will be responsible for attorney fees.

By contacting one of FranFinders expert franchise consultants, you can be referred to a competent franchise attorney that can review any franchise agreement sample.