Question

For the franchise Ace Hardware

• Provide the following:

1. A brief introduction of the business.  
2. Discuss what the franchisor offers to help a franchisee be successful.
3. Provide the total investment required to own and operate the franchise and calculate the cost of financing. If a range is given, provide the range and calculate the average total investment.
4. Assume you will finance the cost of the total investment (or average total investment) and present the following scenarios:

• Assume a 5-year loan period at 5% interest rate per year and provide the following:
  • Amount borrowed
  • Monthly payment
  • Total interest cost for the life of the loan
  • Total of payments for the life of the loan (not number of payments)
• Assume a 10-year loan period at 6% interest rate per year and provide the following:
  • Amount borrowed
  • Monthly payment
  • Total interest cost for the life of the loan
  • Total of payments for the life of the loan (not number

Based on the information you have compiled for your selected franchise, do you believe the franchise is a worthy investment? Why or why not?

5. Which financing option would you select and why?

Answer 1

A brief introduction of the business.  

Ace Hardware

Started in the year 1928 in Oak Brooks, Illinois Ace Hardware is a wholesaler of hardware and related products, and offers franchise in the hardware retail and rental space. The company was started after 4 hardware store owners came together to buy merchandise in bulk which would increase profits and help compete effectively with larger stores. Today the company has thousands of stores across 7 countries.

Discuss what the franchiser offers to help a franchisee be successful.

The company has a department called as Retail Training department, which conducts training sessions to help educate interested parties. These sessions cover a wide array of topics like - management and leadership, retail operations, selling skills and customer service, as well as select product and project training. Ace Hardware also offers financial assistance and is also listed on the Small Business Administration (SBA) Franchise Registry, which allows a franchise to avail an SBA loan.

Provide the total investment required to own and operate the franchise and calculate the cost of financing. If a range is given, provide the range and calculate the average total investment.

Initial Franchise Fee – Affiliation Fee	$5,000	$5,000
Capital Stock Subscription	$5,000	$5,000
Signage - Exterior Signage	$5,000	$35,000
Signage - Interior Decor	$15,000	$32,000
Leasehold Improvements - Decorating, Furniture and Fixtures ($9 per sq. ft.)	$27,000	$135,000
Telephone and Other Equipment	$10,000	$20,000
Computer System with Point-of-Sale (Hardware/Software)	$45,000	$80,000
Rent - First 3 months	$3,000	$60,000
Prepaid Expenses - Security Deposit, Dues, Permits, Subscriptions and other Prepaid Expenses	$3,000	$15,000
Opening Inventory	$150,000	$1,000,000
Initial Supplies	$500	$2,500
Insurance	$2,500	$30,000
New Investor Retail Training	$0	$37,730
Additional Funds - Working capital for the first 90 days	$15,000	$150,000
ESTIMATED TOTAL	$286,000	$1,067,230

The above costs are a range between lowest and highest costs to start a business on a leased property. The lowest value is $286000 and the highest is $1067230. Let's assume a median amount of the two as $650000 to start a franchise of Ace Hardware.

Assume you will finance the cost of the total investment (or average total investment) and present the following scenarios:

Assume a 5-year loan period at 5% interest rate per year and provide the following:

Amount borrowed: $650000

Monthly payment: $12266

Total interest cost for the life of the loan: $85978

Total of payments for the life of the loan (not number of payments): $735978

Assume a 10-year loan period at 6% interest rate per year and provide the following:

Amount borrowed: $650000

Monthly payment: $7216

Total interest cost for the life of the loan: $215960

Total of payments for the life of the loan: $865960

Based on the information you have compiled for your selected franchise, do you believe the franchise is a worthy investment? Why or why not?

Yes, investing in Ace Hardware is a good option because of the following reasons:

- No requirement to pay a franchise royalty fee, which is not uncommon but rare

- A portion of the profits made by the company is distributed among the franchises annually

- A flexible product range provided with training and support from the company

- It is a globally recognised brand and is quite well embraced locally

- It operates in an industry which is fad-proof

- It ranked at no. 13 in Entrepreneur.com's 2019 Franchise 500 list

- None of Ace Hardware's franchise owned stores or company owned stores have shut operations since opening

Which financing option would you select and why?

Monthly payment: $12266

Total interest cost for the life of the loan: $85978

Total of payments for the life of the loan (not number of payments): $735978

Monthly payment: $7216

Total interest cost for the life of the loan: $215960

Total of payments for the life of the loan: $865960

It is evident from the above illustrations that option 1, 5% interest for 5 years is an optimum financing option. Total interest incurred would be  $215960 for option 2, which is more 2.5 times of option 1 which is $85978. Although, some might consider option 2 to lower their cost of operations.