Working capital is often neglected when potential franchisees are researching possible franchise opportunities and when franchisors present their franchise offering to potential franchisees.
Simply put, working capital is the money you must have available to meet your ongoing expense obligations.
When you buy a franchise, you immediately start to incur costs like, rent deposit and monthly rental, water, electricity, salaries, wages, telephone, internet connectivity, data and the list goes on. These obligations must be met for the franchise to establish itself and begin to make a profit from where these ongoing costs will be paid in the future. But until the franchise can afford these monthly costs, the franchisee must be able to carry them. You also need to consider that if you have left your place of employ to open your franchise, you will also need to be able to fund your personal expenses like, mortgage bond or rent, vehicle instalments, cell phone contract, water, electricity etc., until you can draw a salary from the franchise. You must know exactly how many months you will need to fund yourself.
From the franchisor’s perspective, it is imperative to establish if the potential franchisee does in fact have the necessary working capital to fund these obligatory ongoing expenses or the franchise will probably fail.
To calculate if you can afford to buy a franchise, it is the Total Cost and not just the cost of the franchise that must be considered. An example of the Total Cost is:
Total Cost = Franchise Fee + Set-Up Cost + Working Capital
The Consumer Protection Act makes it is a legal requirement that every franchise Disclosure Document must include what the expected working capital requirement is and how it is calculated so that the potential franchisee is made aware of it. However, be wary that the working capital in the Disclosure Document is realistic and it is suggested that your accountant verify the financial projections that are presented to you by the franchisor.
To know what working capital you need when buying a franchise may be the success or failure of your franchise. It is THAT important!
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