As you — a soon-to-be franchisee – make your itemized list of start-up costs, the biggest number will probably be the funds it takes to cover your personal expenses before you draw a paycheck.
The way these funds come to you can be handled in a number of ways. You can put the funds into the business and pay yourself a salary so that you have the initial setup that includes salary. Or, you can leave the funds in your personal savings and just take what you need to get by while you move your company along to the point where it can actually begin paying a salary. There may be some tax consequences involved, so you may want to talk with an accountant to determine the best way to set up your compensation.
This type of funding is not only the largest, it is also the most awkward when you seek financing for your business launch. It is one thing to explain to your lender that you need a loan to buy a van and cleaning equipment for a janitorial business. It is quite another to borrow money to pay for your personal expenses while you push your business to the point where it can pay for your services. Most start-up business owners use savings for this purpose or else use a financing source that doesn’t inquire into the use of the funds. These unencumbered loans can include home equity loans, borrowing against life insurance and other loans that behave more like lines of credit rather than notes that are tied to specific purchases.
This figure can run anywhere from zero to $50,000, even $100,000 or more. If you are a stay-at-home parent and you are launching a business to create a second income, the figure is zero. But if you have to quit a day job that has been supporting a family, the amount can become considerable. Keep in mind as you shop for franchises that the length of time it will take before the franchise is able to replace your income is a major factor in the real cost of the franchise. From that point of view, a franchise that takes four months to replace your income but has a high franchise fee may actually be less expensive than a company with a lower fee that will require you to work for free for eight to 14 months.
It may be a challenge to find out just how long the lag period will be. There are several variables, including your ability to grow the company, the competition within your local market, your income needs, and the pricing structure for your particular community. Franchisors are not required by law to make earnings claims so the franchise company may be reluctant to give you specifics. Other factors such as the realities of your local market and its competitive environment may be just as much a mystery to the franchise company as it is to you.
Your best bet to nail down this important number is to talk to as many other franchise owners as you can to see if any are willing to give you some specifics of their experience. If you are well outside their competitive territory, they may be very open about their experience. I have heard some franchisees go into a surprising amount of detail about their salary and how long it took to build it. Some franchisees can relate to your precarious position and will want to let you know the truth. You’ll find others will be guarded about financial information. You may, however, be able to get a franchisee to reveal how long it took before he could draw a paycheck, even if he won’t tell you how big the paycheck is