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Do you have enough money to buy a franchise?

Sarah Stowe

“Do we have enough money to buy this business?” This is one of the first questions you’ll need to address when you start to investigate a franchise.

Despite what many people think, you can’t just borrow the money.

If you really want to own a business, but don’t have any savings, you’ll need to start building up a nest egg. Let me explain.

Every franchise has start-up costs which you’ll need to cover. These typically include franchise fees, training costs, equipment and fitout, and accounting and legal fees. If you’re buying an existing business it includes the purchase price.

Many people think that they can simply borrow the money. For example, ‘against their home’ or even ‘against the business’ (which is possible, but only in special circumstances). They are often disappointed to find out their home isn’t like an ATM.

The reality is, when you’re buying a franchise you need to put in some of your own money. Not only do banks require it, it’s a sensible risk reduction and asset protection strategy to put some of your own money into the business.

How to reduce your debt

Here’s an illustration. Jason and Sally each own a franchise. The two businesses are the same in every way – except how they are financed.

Jason starts off with a mortgage of $400,000 on his home. He borrows $200,000 to buy a franchise, which increases his family debt to $600,000. The total loan repayments will be significantly more than before, especially as a business loan usually needs to be repaid over the term of the franchise agreement.

Sally also started with a $400,000 mortgage. But she also has savings of $60,000 to put towards the purchase of the business.

She only needs to borrow an additional $140,000.

Because she has less debt, Sally has lower monthly loan and mortgage repayments than Jason. Lower costs mean her business will be more profitable than Jason’s. And lower loan repayments mean less financial pressure.

Minimise financial pressure

It doesn’t matter whether the loan to buy your franchise is secured or unsecured, it’s still debt. And especially if you already have debts, it’s important to think about the overall effect on your cost of living.

The more money you borrow to buy the business, the more financial pressure it (and therefore you) will be under. Not only do you need to make enough to cover your living expenses, there’s also the cost of the business loan.

Put simply, using some of your own money to finance the business will reduce the debt burden and increase your financial flexibility.

Which leads to another question: “Where do we get this money?”

The most obvious source is money you have saved (in a Term Deposit, Savings or mortgage offset account). Alternatively it might come from a redundancy package, inheritance or other ‘windfall’ gain. 

So, if you don’t have savings, now is the time to get started.

What things are you prepared to go without so that you can realise your dream? Could that be an overseas holiday or two, some home renovations, or your regular shopping at the Apple store?

A little sacrifice now can pay dividends when you have money to finance your own business.