How Much Working Capital Candidates Need When Buying a Franchise

It’s no secret that investing in any type of business—franchises included—requires a financial investment. But when it comes to making the leap from being a prospective candidate to being a franchisee, how much working capital do entrepreneurs really need in order to make their dreams of business ownership a reality?

According to Glen Snyder, chief development officer for Green Home Solutions, the working capital that franchisees need before signing on the dotted line extends beyond initial startup costs. However, that’s something that’s often forgotten in the franchising process.

“For me, I think one of the most important things that kind of gets overlooked is initial operating costs beyond initial startup costs. Whatever your startup costs are, until your business begins to generate revenue, you need enough capital reserved to keep your business running smoothly,” said Snyder. “The amount of time it takes to see consistent revenue varies depending on the franchise you invest in—some brands can start seeing profits quickly, while others take longer to get to that point.

But it’s important to know that information before signing your franchise agreement so that you can plan for the future accordingly. You need enough capital to run your business properly while ramping up revenue.”

That operating capital is what positions franchisees for success beyond the first few months. There’s a lot that goes into running a business, and it’s essential for local owners to ensure that their locations are properly staffed and equipped even before opening their doors for business.

Sharon Peterson, director of franchise sales for Best in Class, says that it’s essential for candidates to be honest when examining their financial situations before deciding to invest.

“How much working capital a franchisee needs depends on a combination of their specific situation and the brand that they decide to partner with. If there’s a couple, for example, who want to start a business together, and one of them is still working full time while the other focuses solely on their new venture, they might not need to have as much money saved up as an individual owner who is relying on only one income,” said Peterson. “There are a lot of things for candidates to take into consideration before they determine the amount of working capital that they’re comfortable with, from the current assets that they have to what types of bills they’re paying on a monthly basis.

But what it ultimately comes down to is what makes the most sense for each owner’s individual financial situation.”

In order for franchisees to determine what working—and operating—capital they should reserve for their new business, they need to do their homework. Because each situation has the potential to vary, it’s up to candidates to work with their consultants and brands to finalize the right financial plan.

“Do your due diligence before entering into a franchise agreement. Make sure that you have supporting documentation and evidence showing that you’re capitalized properly—franchisors need to know that their owners are in a good spot financially to succeed,” Snyder said. “Having access to working capital is one of the most important things when it comes to launching a franchise. Not only do franchisors need to be confident that their owners have the right resources to be dedicated to their brand going forward, but you—as an owner—need to be positioned for long term success.”