How Much Money Is Needed To Start a Business?
Make Sure Capital Expenses Last Through Start-Up and Beyond
Jul 7, 2008
But most franchisors will provide a suggested range of money to cover start-up costs, plus working capital. Remember, though, these are only estimates, intended to provide a ballpark. That doesn't mean that it can be relied on to the penny. Just as you do with a home remodel, add additional money onto this plan to cover anything unexpected because the unexpected will happen.
Two types of start-up costs
The start-up cost can be divided into two groups: fixed and variable. Fixed costs are pretty well determined and won't vary much. These include things like the franchise fee and perhaps a starter kit. Even things like business cards typically stand by the expected costs. But other areas can be more problematic to determine. Variable costs that one might encounter include things like real estate or lease costs, remodeling expenses, permits and professional fees.
The franchise fee may range from $10,000 to $100,000. However, these fees don't vary from what's published in the Franchise Disclosure Document. Any other franchisor fee should be explained in the FDD as well. Franchise fees typically cover the cost of training. Grand opening assistance or any sort of manager/employee training should be spelled out ahead of time.
Look twice at variables
The biggest cost likely will be real estate, leasing, building and remodeling. As anyone who has ever done a home project knows, these costs can get out of hand quickly. Plan extra for the extras here. Of course, if a home-based business is planned, it might not require the same level of uncertainty. But realize that more might be required to get the home office set up than anticipated.
Operating capital
Plan ahead to make sure that the business launches with enough to cover operating expenses, an area where many businesses falter. Restaurants are particularly hard to estimate here. The restaurant owner has to buy tomatoes, for instance, without knowing if he'll have customers, or how many. Employees have to be paid, electricity hooked up and equipment and supplies purchased. Make sure there's enough after the doors are opened to keep everything running smoothly for awhile.
A franchisor can assist in helping to determine exactly how much is needed. However, add this question in when talking to existing franchisees, too. What costs did they not factor in? If they had anything to do differently in financial planning, what would it be? Pick the brains of those who have been there before -- that's what makes franchising work.
