Bus 6500

Business 6600 Essay, 700 words, APA format, 3 references (Krispy Kreme)

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.

Below is an example of what my partner wrote to give you an idea of what is needed.  This hits the 3 places and goes into the money part.

  The textbook defines capital as the money needed to start operations (Nickels, McHugh, & McHugh, 2014).  Three franchises, I chose to analyze the capitalization fees for are Wendy’s, Burger King, and McDonald’s.  If someone wanted to open a Wendy’s franchise, the franchisee would need to borrow a minimum of $316,000 (“Wendy’s Franchise Cost & Fees,” n.d.).  If one were to calculate the borrowing cost of a business loan at a 5% interest rate for 5 years, it would cost the borrower $41,798.61 in finance charges. The borrower would be responsible for a total of $357,798.61 of repayment fees.  To borrow the same amount of money and get a loan for 10 years at a 6% interest rate, the total finance charge would be $61,066.41.  This would require a repayment of $377,066.41. If the franchisee were to borrow $316,000 for 3 years at an interest rate of 4%, the total finance charge would be $19,864.85.  The franchisee would be responsible for a total repayment of only $335,864.85.

  If someone wanted to open a Burger King Franchise, the franchisee would have to borrow a minimum of $1,416,600 (“Burger King Franchise Cost & Fees,” n.d.).  If the franchisee were to get a business loan at a 5% interest rate for 5 years, it would cost the borrower, $187,379.40 in finance fees.  This would require him to pay back $1,603,979.40 total.  If he borrowed that same amount of money for 10 years at a 6% interest rate, he would have to pay $470,659.92 in finance fees or a total of $1,887,259.92 of repayment.  For a 3-year loan at a 4% interest rate, the franchisee would be responsible for $89,052.36 in finance fees or $1,505,652.36 in total repayment.

  If the person wanted to open a McDonald’s Franchise, the capital required is a minimum of $1,100,000.  Almost half of this money or $500,000 is required to be liquid capital (“McDonald’s Franchise,” n.d.).  If the franchisee were to borrow the capital required for 5 years at 5%, it would cost the franchisee $145,501.40 in finance fees or a total repayment of $1,245,501.40.  To borrow that same amount of money for 10 years at a 6% interest rate, it would cost the franchisee $365,470.36 or $1,465,470.36 in total repayment. If the franchisee were to use only 3 years to pay off the loan at a 4% interest rate, it would cost the franchisee $69,149.80 in finance fees and a total repayment of $1,169,149.80.

  Based on the previous calculations, it benefits the franchisee to take a shorter loan to reduce finance fees and total repayment costs.  However, as Dr. Simpson brought up, a startup business often does not make money during its first year.  It often takes time for a business to make its money back.  Along with this money, businesses need to pay the operating expenses including employee’s wages or salaries.  Of the total revenue the company takes in, the operating expenses need to be subtracted (Nickels, McHugh, & McHugh, 2014).  This is often why businesses have to take loans for longer periods.

  Franchise Direct broke down the actual expenses for the first 3 months for a potential franchisee of Wendy’s.  The initial investment of $316,000 includes the numerical values for a potential investor that is leasing the land, building, improvements, equipment, and signage.  This means, it would cost the franchisee, even more money to finance their business.  In addition, the franchisee would have to take out more money for their initial investment to fund the business for an entire year.  Instead of only paying $24,000 for the cost of leasing for 3 months, the franchisee would have to finance $72,000 more to cover the entire year of their lease (“Wendy’s Franchise Cost & Fees,” n.d.).  Financing this extra money would increase the finance fees substantially.  For a 5-year loan at 5% interest, the franchisee would be expected to pay $51,322.31 in interest or $439,322 total in repayment.  This is almost a $10,000 difference. The amount a franchisee has to take out to invest in a business is what I initially expected.  This is the risk/return trade-off principle at work (Nickels, McHugh, & McHugh, 2014).  Borrowing money, especially from banks can be expensive because the risk the bank takes is high.  Most people who want to start a franchise do not have the money to start up the business on hand.  However, the return a franchisee receives on their investment when they open a successful business can be well worth the risk.