Financial Franchise Opportunities: What to Check First

The types of financial franchises

Most financial franchises fall into tax preparation, bookkeeping and accounting support, payroll services, insurance agencies and credit or business consulting.

Each category works differently:

• Tax preparation. Heavy seasonality, with most revenue in the first four months of the year.
• Bookkeeping and payroll. Monthly recurring fees from small businesses, which smooths income.
• Insurance and benefits. Commission based, often with licensing requirements.
• Business consulting. Revenue depends on your own selling and expertise.

Recurring revenue models are usually easier to finance and plan than seasonal ones. See best and worst franchises to buy for general selection criteria.

Where the money goes

Expect an initial franchise fee, build-out or equipment, software, training travel, marketing launch costs and working capital for the first months.

The Franchise Disclosure Document, or FDD, lists the estimated initial investment in Item 7 and ongoing fees in Item 6. Read both. Then add a realistic operating reserve, because the FDD range often does not include your own living expenses during ramp-up.

Typical cost categories to budget for:

1. Franchise fee paid up front
2. Office lease, deposits and furnishing
3. Licenses, bonding, errors and omissions insurance
4. Technology and software subscriptions
5. Launch marketing
6. Working capital for payroll and rent until clients pay

Our guide to average franchise fees explains how fees and royalties are structured.

Rules and licensing to confirm

Financial services are regulated. Tax preparers, insurance sellers and some advisors need credentials or licenses, and requirements vary by state.

Before you commit, confirm what you or your staff must hold. That can include a preparer tax identification number, state registrations, insurance licenses or securities licenses. Some franchisors help with this and some do not.

Ask a franchise attorney to review the agreement. Pay attention to territory rights, renewal terms, transfer rules and what happens if you leave. The pros and cons of buying a franchise is a useful companion.

Questions to ask existing franchisees

Franchisee conversations reveal what the FDD cannot: real ramp-up time, support quality and how owners feel about the fees.

The FDD lists current and former franchisees. Call several, including some who left. Ask:

• How many months until you covered your own costs?
• What did you spend beyond the estimates?
• How good is training and ongoing support?
• If you could redo the decision, would you?

Do not rely on a franchisor's earnings claims unless they are in the FDD, and treat any figure with care. Never take a number from a salesperson that is not in writing.

Financing a franchise purchase

Franchise buyers often combine personal savings with an SBA loan for the purchase and use faster working capital for the early operating months.

Franchise fees and build-out are commonly financed through SBA programs or bank loans, which are slower and have lower cost but require documentation. ROI Funder does not place startup loans for businesses under six months, so it fits best after you have opened and have revenue. Read SBA loans for startups if a launch loan is your goal, and see the guide to getting a loan for your franchise.

Once the location has operated for 6+ months and generates $20,000+ in monthly revenue, with 500+ FICO, ROI Funder can look at working capital or equipment financing for growth.

Run the payback math before you buy

Estimate monthly revenue, subtract royalties and operating costs, then see how many months it takes to recover your total investment.

Illustrative example: total investment of $120,000. Monthly revenue of $25,000, royalties and marketing fees of 10 percent, other costs of $15,000. That leaves $7,500 a month before debt service and your own pay. Payback is 16 months at that level, but only if revenue ramps as planned.

Test a case where revenue is 25 percent lower. If the business cannot cover its costs, you need a larger reserve or a different opportunity. Use calculate small business loan ROI to structure the math.