How much working capital do you need to be a successful franchise owner?

Welcome to another episode of Atlanta Franchise Today with host Leslie Kuban, expert franchise consultant and owner of FranNet Atlanta. Atlanta Franchise Today is dedicated to bringing entrepreneurs and business owners the best practices and tips for their franchise goals. Today, Leslie answers all of your questions about working capital.

Transcription: 

Leslie Kuban:
Hey everybody, welcome to another episode of Atlanta Franchise Today. I’m your host, Leslie Kuban. A question I am frequently asked is, “How much cash will I need to operate my franchise= after my doors are open? In other words, how much working capital will I need to be successful?” Today I’m going to shed some light on how to think about working capital, but first some definitions and some background information.

Leslie Kuban:
In a prior episode, I talked about the total investment being three buckets of money that you’re going to need. Number one is the franchise fee, number two is one time startup costs, and number three is working capital, which is the cash you’ll need to cover the ongoing costs you know that you’re going to have such as rent, payroll, and insurance. The first two are pretty straightforward but the working capital bucket has the most variability and, if it’s underestimated, you can really run the risk of being under-capitalized in your business.

Leslie Kuban:
It is really important to understand that you and I as individual franchise owners are going to make some different decisions about how we run our businesses, and those different decisions will directly impact how much working capital is needed. An example is debt. Some franchise owners take on loans to start their businesses, others just self-fund their business, and how much debt and the type of debt is going to be a big factor in the working capital need. Some debt has higher interest rates than others so someone who does not have a loan is not going to need as much up front working capital as someone who does.

Leslie Kuban:
A second variable is the role in the business that the franchisee is choosing to take on. Some franchise owners are very hands on owner operators in their business, others are more semi-passive investors while they are maintaining another job or they have another business and they’re approaching their franchise as a side venture. If that’s the case, they’re going to need to hire a strong manager from the very beginning and they’re going to have a larger payroll need out of the shute versus someone who is starting their business as an owner operator running the business themselves.

Leslie Kuban:
A third variable is how large and how fast you want to grow. Some franchisees want to get to multi-units very quickly. If that’s the case, they’re going to need a larger marketing budget, they’re going to have a larger payroll working capital need at the very beginning versus a franchisee who is opening more slowly and methodically. There’s also some external factors that come into play that will affect working capital, such as geography. The cost of doing business in certain parts of the country are a lot more expensive than others. Rent, insurances, and wages can vary greatly from one region to the next. Then there’s local regulations. Some cities or some counties might require permits and licenses that have a cost to it that other areas will not.

Leslie Kuban:
The good news is there are tools and strategies to help you understand what your working capital need is going to be based on your situation. A unique and wonderful aspect of franchising is how the government helps us out. The federal trade commission regulates how information has to be disclosed to prospective franchise owners like you or me. There’s a document that must be produced and updated every year called a franchise disclosure document. In franchise speak, we call that FDD for short. In future episodes, I will have franchise attorneys join me and we will dissect and explain how to read and use this FDD to your best advantage.

Leslie Kuban:
The FDD breaks down the initial investment, the costs involved, and it estimates three months of the working capital that you will need for that particular franchise brand. But it’s really important to understand that this working capital statement is only an estimate and it really only can be an estimate because of these individual decisions and external factors that can make that working capital number go up or down. The FDD is a great starting point but we all need to ask some additional questions to be clear on what kind of working capital to expect. I have some tips on how to do this.

Leslie Kuban:
Number one, connect with your local chamber of commerce in the city or the county where you’ll be doing business and ask them are there certain permits or ordinances for the industry that you want to go to that apply to their particular geographic area. Number two, as a business owner you’re definitely going to want a CPA so go ahead and identify who you would like to work with over the long term and ask him or her what kind of costs they see similar types of businesses incurring in the particular area.

Leslie Kuban:
The third, which is the easiest and most important, is to talk to other franchisees who are similar to you. If you’re going to go into a large suburban area, for example, talk to franchisees who will also operate in a large suburban area similarly to yours. Their costs may be very different than other franchisees operating in more rural areas. If you’re going to open multiple units very quickly and hire managers right away, you want to talk to the franchise owners who also approach the business in that same strategy and understand what their costs were to do so.

Leslie Kuban:
You can’t be afraid to ask financial questions. I know that can be taboo in our culture but most franchisees were in your shoes at one point in the past and, therefore, they’ll be generous and transparent and many of them were asking the same questions back then that you’re asking now, trying to make a good decision for their family just as you are. I hope this episode has been helpful and you’ve enjoyed it. Thank you for tuning into Atlanta Franchise Today, and I’ll see you next week.