Now that you have a good idea of what is required to start a franchise, consider where the money would come from. Specifically, what would be the cost to borrow the money to start a franchise? For this discussion, read the posts from Part 1 and note the costs to start three different franchises. If someone wanted to borrow those amounts of money, what would be the total amount they would pay back? Assume that the borrower had good credit and could get a business loan for 5 years at 5%. What would be the amounts borrowed and paid back if the loans were for 10 years at 6%? How about 3 years at 4%? (example, borrow $10,000 at 6% compounded monthly for 9 years requires a total repayment of $12,966.19)
Once you get a good look at how the length of the loan and the interest rate affect the total amount paid back, consider that a startup business rarely makes money in its first year. To start the business, you would probably need at least a year’s operating expenses, in addition to the cost to start up the business.
Provide a summary of the above analysis on one of the franchises you considered. Is this what you expected, or is the amount much higher or lower than you thought it would be?
You can use online calculators for the bulk of the math above. There is a good set of online financial calculators at http://tcalc.timevalue.com (I used their Fixed Rate Mortgage Calculator with the “Home price” being the amount you want to borrow, the “Down Payment” of 0%, a “Loan Term” of 9 years, and an “Interest Rate” of 6.000%).
Students answer to relate this essay off of:
I chose to research the Krispy Kreme Doughnuts Corp. and the requirements needed to open up a new franchise. I found that it would take anywhere from $275K to $1.9mil to open your own Krispy Kreme franchise, depending on the size of the location. The company requires applicants to have $1million in assets and a minimum net worth of $2million. The company does not offer financial assistance to prospective franchisees.
With a total investment of roughly $2million and a approximated 20% return on investment, I feel this is a low risk-low reward franchise. The business is always steady but there are hardly any peak times of business. Krispy Kreme Doughnuts seem to only peak when the location is fresh and new. Once customers get over the hype, the business will level off. I think this franchise is searching for franchisees that are already established and in that case, the franchisee can be patient and allow the business model to create profits after 1 or 2 years.
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