A few broad questions related to the finance sector of the franchise are: Do you have the financial resources or means to get the resources required to buy a franchise?, will your capital provide you with a cushion for at least one year after you have paid for the franchise, allowing a one-year period of time to break even?, what is a high estimate of your fixed expenses such as rent and your variable and operating expenses such as wages and stock?. When buying the Zara franchise rights, the franchise fee typically varies between 5% and 10% of the franchise store’s sales. Included in that fee, Zara offers franchisees full access to corporate services, such as human resources, training, and logistics at no extra cost. They also allows them to return up to 10% of purchased merchandise, which is a higher level than many other franchisers permitted. This will cut down on the sunk cost that is purchased stock.
Then, breaking down the previous questions further, we have to ask ourselves more specific financial questions before buying the franchise. How much initial investment will you need to buy the franchise? We figured that the startup costs would include the franchise fee, employee training, operating licenses, equipment, and the expenses involved in running a retail space, such as moving expenses, furnishings, equipment, décor, signs, and landscaping. The employee training, however, is included in the franchise fee and the landscaping expenses are covered by the rent expense by the University Village complex owner. The franchise fee was estimated to cost from $20,000 to $30,000. The licensing, furniture, and equipment costs were estimated at $50,000.
Employee TrainingIncluded in franchise fee
Equipment & FurnishingsEstimate$50,000
The next question we developed was, what are your ongoing expenses until the business starts showing a profit? Ongoing expenses generally include paying royalties to the franchiser, advertising fees, equipment maintenance, employee costs, rent, and inventory. According to Zara, they charge 5% to 10% percent of the franchise stores sales as a royalty cost based on a yearly revenue amount of 1.5 million dollars a year (based on a goal of sales equaling $300 per square foot). The rent cost of the retail space is $30.00 per square foot times the 5,000 square feet in the store. Following Zara’s business plan of limited advertising; they calculate that it should cost no more that 0.3% of the stores total sales. When calculating employee costs, we based our calculations on have 2 store managers and 10 associates. The managers will be paid fixed incomes of $40,000 with incentive bonuses up to an additional one-half. The associates will be paid $10 an hour. All of our employees will get benefits, equaling 40% of their wages.
Royalties5% - 10% of Sales$75,000 - $150,000 *
Rent$30/ft2 * 5,000 ft2$150,000
Advertising0.3% of total sales$4,500
Manager Wages2 * $40,000 + Bonuses up to one-half of salary$80,000 - $160,000 Associates Wages10 People + $10/ hr. * 2000 wrk hrs/year$200,000 Benefits40% of salary$32,000 - $80,000
Total $541,500 - $744-500
* Based on a yearly revenue equaling $1.5 million.
The next question we came up with was how much available cash do we have to put towards the franchise? We knew that we needed to evaluate the assets we have available to meet our initial and ongoing expenses. This was a difficult question for us to consider since we do not know what kind of financial standing we will be in when we reach the time in our lives when we are to make the decision whether or not to buy the rights to the Zara franchise.
The last financial related question that we struggle with was what financing can we get to make up the difference between our expenses and cash investment?...