Initial investment is the amount of money required to start a business. It is a big determining factor for most people when deciding in which business to invest. Not all franchise systems are created equal and closely examining an offering’s initial investment information can help you make an educated decision.
Because a franchise is based around a system that has been previously implemented, a franchisor usually has a fairly accurate estimate for that particular business model’s initial investment. Found in Item 7 of the Franchise Disclosure Document (FDD), this estimate includes considerations such as startup expenses, franchise fees, working capital, professional fees, training and support, lease, and buildout costs.
There are many variables, such as geography and real estate, that can impact costs and therefore can only be presented as an estimate range. Even business models in the same industry can also vary in their initial investment depending of the levels of services and supports they do or do not provide to their franchisors.
When exploring business opportunities, it is very important to take an honest assessment of your financial situation and available capital. Completing a personal inventory will provide a realistic sense of what franchise opportunity aligns with your budget and investment goals. Franchisors will have their own set of financial requirements, which include liquidity and net worth, so be aware of what those are when considering fit.
Some franchisors offer certain discounts for new franchisees that can help offset some of the initial costs. When familiarizing yourself with financial requirements, take the opportunity to ask about any type of discount that might be offered. Sport Clips Haircuts, for example, offers a military discount to qualified veterans for up to 20 percent off initial franchisee fees.
You also should have a clear picture of what your living expenses are, as they are not included in the initial investment calculations. This can help determine which business model is most viable for your situation. Does the business model allow you to maintain your current employment, providing a steady income as the business grows or would you be required to work in the business full-time, leaving behind the safety net of your current paycheck?
Sport Clips has a proven manager run business model. Franchisees recruit and hire qualified managers to run the daily operations of the store. Supervision, oversight and leadership is done on their own schedule. Franchisees have the freedom and flexibility to maintain their current jobs because they aren’t required to be on-site on a daily basis, thereby providing financial stability while building a business.
Once you have a clear picture of your finances and your budget for investment, you can start narrowing down your search. Initial investment ranges for franchises can be broken down into three categories: low, medium and high. Each have their own inherent risks and rewards that should be taken into consideration.
An initial investment in the lower range is considered to be less than $150,000. Since less capital is required, less risk is associated with it. At the same time, it may not be your best choice. While the investment and subsequent risk may be low, it could turn out to be more expensive in the long run. Resale value is usually lower at this level of investment. Many businesses with a lower barrier of entry may experience market saturation and consequently be highly competitive. Less upfront investment could mean less support and training provided by the franchisor, leaving you with an expensive learning curve. Take a look at the turnover rate for the business model and closely examine the services and support included in the offering.
A medium initial investment would be considered between $150,000 and $500,000. Financial requirements will be more rigorous than the lower investment range. Start-up time may be longer than a lower range investment, as there may be a build out process, with hiring and stocking required. But with the greater investment comes greater potential for returns on investment and profitability.
Sport Clips was named the Top Medium Investment in the highly regarded Forbes' Best Franchises to Buy 2018 rankings. Forbes cited the brand’s five-year growth rate of 12.3 percent and credited the system’s sustainability and demand, value for investment, as well as the franchisor support and stability as reasons for naming it number one.
A high initial investment would be considered one that is more than $500,000. With such a substantial investment the financial stakes are high, and the high investment can be a barrier of entry to this investment range. There usually will be greater operating and staffing costs, and inventory and overhead may also be significantly greater with such an investment. With these greater costs, there is more room for error and risk is much greater. This also means there is potential for greater reward, if one is not averse to the associated risks.
When examining business opportunities, initial investment is invariably at the top of the list of considerations. Understanding your budget and goals, both short- and long-term, will help you assess how the business model aligns. Cost is important, but just as important is the value you receive for the investment.