The Million Dollar Question - Should I Borrow More Money to Invest in a More Expensive Franchise?

Written on the 24 April 2012 by Mark Fernandez, Director, Business Development Alliance

One of the many questions that I am asked is whether or not someone should borrow more money and buy into a more expensive franchise system or just to buy a franchise with their existing cash reserves? This is the million dollar question! It really comes down to a few key areas and it may not always be that the more money you invest the higher the returns.

• Can you really afford this business? Are you stretching yourself too far?
• What assets will need to be used as security by the bank or finance company to receive funding?
• What’s the impact on my overall situation if the business folds – how will the debt be repaid?
• Have I borrowed enough money to ensure that I do not require any more capital in the short term?
• Does the business fit you? It has to suit your skills, your family and your lifestyle in the long term.
• Are your projections realistic?  How have they been arrived at?  Do they take account of all the financing costs?  These can be considerable.
• Is the projected income enough for you to live on and provide profit for growth?  Also, to pay for any borrowing?  i.e. Interest and capital repayments?
• What is the best use of my money as I know that I can achieve a 5-7% return by not doing anything and leaving my cash in a term deposit.
• What structures do I need to put in place to run a more sophisticated franchise? Generally the more investment required the more structures, staff, obligations and demands on time and energy are required.    

In essence you are the only one that can make your own decision on how much capital is required to invest into your next business. Whether you are investing 100% of your own funds or you borrow more money to purchase a business you need to seek the right advice from your accountant, lawyer and business advisor prior to signing on the dotted line.

Mark Fernandez
Director
Business Development Alliance
www.bda-online.com.au