When franchising a business, the franchisor often requires a personal contribution from the franchisee. This is the amount of money that the franchisee must invest from their own funds, as opposed to borrowing it from a bank or other lender.
There are a few reasons why franchisors require a personal contribution. First, it shows that the franchisee is serious about the business and has some skin in the game. Second, it helps to reduce the risk of the franchise failing. If the franchisee has to borrow a lot of money to start the business, they are more likely to walk away if things get tough. Third, the personal contribution can be used to cover some of the upfront costs of starting the franchise, such as the franchise fee, training costs, and equipment costs.
The amount of personal contribution required varies depending on the franchise. However, most franchisors require a minimum of 30% of the total investment. For example, if the total investment for a franchise is $100,000, the franchisor might require a personal contribution of $30,000.
How to calculate your personal contribution
To calculate your personal contribution, you will need to know the total investment for the franchise. You can get this information from the franchisor’s disclosure document. Once you know the total investment, you can simply multiply it by 30% to get your personal contribution.
Let’s say you are interested in franchising a kitchen franchise. The total investment for the franchise is $100,000. To calculate your personal contribution, you would multiply the total investment by 30%, which would give you a personal contribution of $30,000.
Benefits of having a high personal contribution
There are a few benefits to having a high personal contribution. First, it will make you more attractive to lenders. If you can show that you have a significant amount of money invested in the business, lenders will be more likely to approve your loan application. Second, it will reduce the amount of money you need to borrow. This will save you money on interest payments over the life of the loan. Third, it will give you more financial flexibility. If the business is not performing as well as expected, you will have more of your own money to fall back on.
The personal contribution is an important part of franchising a business. It is a way for the franchisor to assess the financial stability of the franchisee and to reduce the risk of the franchise failing. If you are considering franchising a business, be sure to budget for the personal contribution requirement.