The topic of financials is an area of misconception that surrounds franchising and continues to confuse people. In fact, there is a franchise myth out there that you need three years of financials in order to franchise. Let’s cover some background information and understand what financials you need when franchising a business. To start, remember that franchising is a completely different business and you will treat it as such.
When you start the process to franchise, the first step will be to create a separate “entity” to operate the franchising company (see more on the steps to franchise). This will segregate the liability between your existing business and the new franchising business. The new entity is in the business of awarding franchises and other franchise related activities. Your existing business is running as usual and is separate from the franchising company. In other words, your existing business is simply an affiliate (or company-owned business) of the new entity.
Back to the franchise myth. You will NOT disclose any financial information for your existing business (remember, it’s not a franchise location, just a company-owned location!) So regardless of how long your existing business has been around, there is no requirement to show three years or any financial statements for that business in order to franchise (learn if there is a certain amount of money you should be making before you franchise). This franchise myth is busted!
So what is the requirement? It is a requirement that the franchising company (the new entity) show financial stability. At some point, the new entity will need to be funded (more on funding your new entity). The franchising company must show financial strength to provide for the obligations that it will have to the franchisees.
So how much money do you need to fund your franchising company? There is no magic number and it does vary depending on a number of factors. This fund represents money used to help grow your franchise system, so the more, the better. After all, when starting any kind of new business, you need working capital…this is no different.
