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How
Much Does a Franchise Cost?
By
Denise T.
Davis
How
much does a franchise cost? Of course the cost of
obtaining and starting a franchise depends on several
variables. For instance, the type of industry, size and
location are some of the differentiating factors.
However, there are some basics that you could keep in
mind if you are contemplating becoming a franchisee.
First of all, you will usually have to pay a franchise
fee, which averages somewhere between $20,000 and
$30,000. However, the fee could be less than $10,000 for
businesses such as mobile and home-based businesses, or
in some cases could possibly cost $100,000 or more. A
few examples of these more expensive franchises include
building maintenance businesses and some types of
athletic training facilities.
Since you are gaining the advantage of taking part in an
already recognizable business name, and usually ongoing
support from the franchisor as well, franchisors
typically stipulate that a potential franchisee meet
other financial requirements. A predetermined amount of
readily available funds that are not borrowed is usually
a necessity as well as a certain net worth. In order to
pay for ongoing expenses that are not covered by revenue
you will also need a guaranteed amount of working
capital. Depending on the type of business, it is
important that the working capital cover a particular
length of time, ranging from a few months to possibly
two to three years until the business is in full swing.
The franchisor typically provides an estimate of the
amount needed.
Besides the franchise fee, other up front costs could
include professional fees such as legal and accounting
services, insurance, and operating licenses. Employee
training, inventory, and equipment are usually part of
the startup as well. Also plan on, rent and possible
leasehold improvements, and other costs involved in
setting up a retail location including the purchase of
fixtures, signs, and landscaping. You may also incur
grand opening and initial promotional expense to get the
business going.
Keep in mind that many times a higher initial investment
does not necessarily mean a higher return. Often times
franchises can be started with a total initial
investment of less than $200,000 and sometimes even less
than $50,000. Some home-based business such as handyman
franchises and marketing franchises provide a decent
return with little up front cash.
Ongoing, you will need to be prepared to continuously
pay royalties to your franchisor, possibly 4 to 6
percent of your revenue. Also, insurance (liability and
health), inventory, and equipment maintenance would be
continuous expenses. Of course, there will be employee
salary and benefits. Additionally, you may be required
to pay into a national advertising fund.
Before making a decision on a franchise, it is important
to obtain from the franchisor a copy of the Uniform
Franchise Offering Circular (UFOC), also known as the
disclosure document. The up front fees are outlined in
this circular. The document should describe the initial
fee which may be non-refundable as well as the other
startup costs. If there are any items that you believe
might be a startup costs that are not mentioned in the
disclosure, be sure to ask about them.
All in all, you want to be sure your financial situation
will cover expenses for you and your family during the
time it takes to get the business up and running. This
may take several months or a bit longer than that. Keep
mind your operating expenses as well as personal
expenses for the first year or two in business. In order
to have the best chance of success with a franchise, it
is recommended you contact a franchise consultant to
discuss your goals and finances.
How Much Money Can Your Franchise Make?
Why Does a Franchisor Exclude This Information?
Section 19 of the UFOC is sometimes referred to as an earnings
claim: the earnings a franchisor projects for a
franchise of your size, type, and location based on
previous outlets already doing business. Unfortunately,
you may never see this information because most
franchisors don’t disclose it. In fact, they are
protected by law to retain this option.
There are two reasons for the exclusion: first, there is no
possible way to predict how well any one franchise can
do over another, regardless of other franchise
successes. A franchisee will likely take these facts to
heart, pursue the opportunity, then begin to retaliate
should these figures not come to fruition. Secondly,
earnings claims will include financial gains and losses
and people new to the business world have a difficult
time understanding anything to do with “loss.”
Therefore, by keeping the earnings claim portion out, franchisors
are less likely to lose a franchisee candidate during
the early stages of the franchising process.
But, that doesn’t mean they won’t show you some actual
income statements from existing outlets. If you’re lucky
to get some samplings, it will happen later in the
process, at the point where the franchisor senses your
willingness to move forward.
Befriend a Few Franchisees and They May Open the Books
If you are conducting your
due diligence
during the process, you will eventually find yourself
contacting a number of franchisees to get their side of
the franchising story. You will want to talk to
franchisees that have been in the business for at least
three years.
You will not want jump into money matters right away during your
franchisee interview.
Remember, if this person has been operating for at least
three years, something is going right – or not. In any
case, your line of questioning should get you the
answers you’re looking for.
What you have to keep in mind is that every person you meet at one
point was in your position as a prospect. If your
approach is subtle and enquiring, expect to receive a
lot of good, honest feedback, especially if the
franchisee is doing well. Success has a way of making
people talk about their accomplishments.
The Back Door Approach to Getting the Numbers
If getting cold hard figures doesn’t seem possible, you will have
to take another approach to determining if the franchise
opportunity will make you money. While talking to
franchisees, ask these questions and look for the
answers, in brackets below:
1) How long have you been in business?
(At least three years)
2) How long did it take you to get comfortable with your franchise?
(Three months)
3) Has your business been growing year by year?
(Yes)
4) How long before your business broke even each month?
(No more than 18)
5) Are you getting the support you were promised from the
franchisor?
(Yes)
6) Do you see yourself in this business over the next 5 to 10
years? If no, why?
(Yes)
7) Is your annual salary after all these years where you’d expected
it to be?
(Yes)
If you ask these questions in the sequence outlined and take the
responses from at least five franchisees, you should
have a very good idea if your investment in the
franchise will yield you a revenue you will be satisfied
with.
How Safe is Franchising?
Owning a franchise makes you an entrepreneur, a
small business owner. While no guarantees can be made in
any business venture, franchising is one of the safest
investments you can make to succeed as a small business
owner.
Determining the level of safety among the
handful of franchise opportunities you may be interested
in can vary. Mega chains like
Subway have a
proven track record of success; smaller systems on the
other hand may not have the same level of consistent
success. Of course, there is never a guarantee you will
succeed as a franchisee, regardless of the size of the
concept.
There are a number of ways you can assist
yourself in making the best decision when it comes to
investment safety:
Expansion Rate:
How quickly is the franchisor growing? Steady growth
year after year is a good sign that the franchisor’s
management team has developed a strategic growth plan.
If the system is less than five years old, make a note
of how many franchises have been opened during this time
frame. High fluctuations year after year can be an
indicating of unstable operations.
Geographical Coverage:
Is the franchisor growing locally, regionally,
nationally, or internationally? Geographical expansion
should only be taking place after the franchisor has
established a solid base of franchises central to its
head office operations.
Franchise Closings or Resales:
How many franchises have closed or been resold in the
last five to seven years? While there is no formula to
determine the safety of a franchise based on the ratio
of openings to closings (or resales), you should track
how many original franchisees have shut their doors or
sold their business year after year. You will find this
information in the UFOC.
Franchisor Financials:
When you receive your franchise agreement you will also
get the franchisor’s financial statements. Your
accountant can help you determine the financial
stability of the franchisor. The balance sheet is a key
document in this package of financials. If the
franchisor is a public company, you can do your own
research online, reading any of the published press
releases that have been made available.
Justified Fees:
When comparing similar franchise opportunities, you
should examine the franchise-related fees levied by the
franchisor such as the initial franchise fee, royalties,
and advertising fund. You should never base your
decision to buy on the franchise opportunity with the
lowest fees but you should question if there are
excessive discrepancies. A franchisor with very low fees
compared to a competitor requires further investigation.
3
Things To Consider Before Starting Your Own Franchise
By
James Hunaban
Even though you may be plenty excited to start your own
franchise business there are a lot of things that need
to be considered before you do! Franchise investments
can be a great thing for many different types of
business people and if you are the entrepreneurial type
then a franchise may be the perfect solution to starting
your own business. However, if you have tried to set up
your own franchise in the past and actually failed then
perhaps it isn't the company's fault but perhaps you
should have done some fore-thinking about the franchise.
But if this is your second time setting up a franchise,
or even if it's your first, here are some very important
considerations that you must think about before
approaching a company about acquiring a franchise:
The Market around You
The first and foremost issue that you'll want to be
concerned is the market around you and where you live.
One question to ask yourself before you get started is
whether or not there actually is any type of market for
your franchise where you live. You may be someone that
wants a particular product or service, but if there are
no other consumers around the living space that you are
in then chances are that your franchise will be doomed
from the start. Making sure there is a need, want, or
market for the area that you'll be moving into is
crucial to having a successful franchise business!
The Competition
Another issue that you'll inevitably need to think about
is all the competition that you have along the way down
the starting point. It's possible that you may not have
to worry about competition if you are offering another
unique type of product or service that no one else is
offering, but chances are that you'll have some type of
competition no matter how fierce it is. On the other
hand, though, you want to make sure that your franchise
won't be setup in a literal price war zone or else
you'll probably have to keep lowering and raising your
prices just because another retail seller does!
Growth Potential
Being successful with a franchise is something that many
people would like to be, however, one consideration of
starting a company's franchise is your growth potential.
Is the retail store or other item you are pushing always
going to be in great demand or is the market slowly
dying for it? One example of a trend that didn't last
for very long is the Ty Beanie Baby craze. Even though
there was a market for these products in the beginning,
the demand for the toys slowly dropped until they were
not popular anymore!
These franchise fore-thinking considerations are very
important to not bombing out within your first year.
Even though it may seem like your business will never
get off the ground, if your company truly has a unique
product then you don't need to be worried about anything
at all!
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