When you’re considering franchising your business, most of your attention is naturally focused on how to franchise and what it will cost to create your franchise program. But there is another financial consideration you need to know about.
As part of the franchise development process, we will create a separate company for you that will be responsible for your franchising activities. And just like when you first started your current business, your new franchising company will need working capital to get started.
So naturally you may be wondering, “How much money do I need to fund my franchise company?”
There isn’t one magic number that applies to every business or every franchise program. How much your franchising company should be funded depends on a number of factors specific to your situation.
What is important is understanding why your franchising company needs to be funded in the first place and what that funding is intended to accomplish.
Your Franchising Company Is a New Business
Think about when you originally started your business. You probably didn’t open a bank account with zero dollars and expect the business to somehow pay for everything from day one.
Your franchising company is no different.
You are starting a new business whose purpose is franchising. This company will offer franchises, enter into franchise relationships, collect fees, kickbacks, rebates and, most importantly, fulfill the obligations and deliverables as defined in your Franchise Disclosure Document (FDD).
Like any new business, your franchising company needs working capital to operate while you begin growing your franchise system.
That working capital helps put your franchising company in a position to operate and perform its responsibilities without being completely dependent on the next franchise fee coming through the door.
Why Does the Financial Strength of Your Franchise Company Matter?
When someone buys your franchise, they aren’t simply buying the right to use your name. They are entering into a relationship with your franchising company expecting that company to support and guide them as they open your business in their area and continue to pioneer the brand keeping things fresh and relevant.
It is not unrealistic to expect a prospective franchisee to want some reassurance that the franchising company has the financial strength to support such activities.
Regulators (this includes franchise state examiners) are interested in this as well.
When reviewing a franchise offering, regulators may look at the financial condition and net worth of the franchising company to determine whether the company appears financially capable of meeting its obligations to franchisees.
In simple terms, they want to know:
Does this new franchising company have the financial strength to do what it says it is going to do?
That’s another reason why funding your new franchising company matters.
Think of It as Working Capital
Funding your franchising company isn’t about putting money into a bank account simply so that the financial statements look good.
Remember, this is working capital for your new franchising business.
Your franchising company will have expenses associated with operating and growing the franchise system. It will also have responsibilities to franchisees as they enter the system and you onboard them.
The purpose of funding the franchising company is to make sure it has resources available to operate and fulfill those responsibilities as you bring franchisees into your system.
Think about it the same way you would any other new business. You wouldn’t want to start a new business with no working capital hoping that the next customer who walks through the door provides enough money to keep the business operating.
Your franchising company is not any different.
So How Much Money Do You Need?
This is where there is no one-size-fits-all answer. It depends.
How much you should fund your franchising company depends on a number of factors involving your particular franchise program, the deliverables you provide and obligations you have to franchisees.
Some states pay more attention to the financial strength of a new franchisor when reviewing franchise registration applications (take a look at “Franchise Registration States Some States are Tougher”).
That’s why simply picking an arbitrary number or copying what some other franchising company did isn’t necessarily the right approach.
Every franchise program is different, and the amount of funding appropriate for one franchising company may not be appropriate for another.
Funding Your Franchise Company Is Part of the Bigger Picture
The important thing is that funding your franchising company shouldn’t catch you by surprise after your franchise program has already been developed and we turn you over to one of our franchise attorneys.
It’s one of those things that needs to be part of your equation as we put your franchise together.
At The Franchise Maker, we will strategize with you. We will define your deliverables and obligations which will help us arrive at a reasonable suggested amount to fund your franchising company.
That’s very different from simply telling you to put an arbitrary amount of money into a bank account, closing your eyes and hoping that will be enough.
If you’re considering franchising your business and want to understand what may be involved beyond the cost of developing your franchise program, call us directly at 1-877-615-5177. We’ll be happy to talk with you about your business and explain how funding your franchising company fits into the overall process.
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