Before investing in a franchise, determine how much money you will have to give up front and the fees and other charges you will have to pay through the life of the agreement.
The number of people interested in investing in a franchise is increasing, but not all franchisees become successful as a result of the risks.
So how do you minimize your risks while increasing your chances of success as a franchisee? The trick is to study costs, to ask yourself questions, and to talk to people about their experiences.
For starters, keep in mind that the cost of the franchise package must cover everything from the initial fees to the operating capital. Costs vary, but you must study the following package components carefully before making a decision:
Build-out construction costs. The so-called build-out costs cover the construction of your store, and many franchisers will demand preapproval of your chosen location. Franchisers also have a standard computation of your building cost per square meter, but that will vary according to your location. Some will build the site for you, while others will be happy to let you do it yourself. If you choose to build the store yourself, make sure you stick to design and construction standards to avoid redoing anything.
Equipment. Many franchisers will specify the types and quantity of the equipment you need, as well as their authorized suppliers. Equipment prices are standard, and the franchiser is normally able to negotiate better terms with suppliers, and therefore to lower your costs.
Furniture and fixtures. The franchiser normally provides all the equipment you will need from authorized suppliers, and to the franchiser’s specifications. However, check if the franchiser allows you to get your equipment from other sources.
Signage and trademarks. The cost of the proprietary trademarks is also provided in the franchise package.
Utensils and wares. The franchiser will provide you with a list of these items. Some franchisers will allow you to buy them from the open market if their quality does not vary.
Initial fee. This is a one-time fee that you pay the franchise for the use of this trademark and business system. It is site-specific and non-refundable, so you must study the franchise offering carefully before you decide to pay even a portion of it. Signing the franchise agreement obliges you to pay the full amount.
The initial fee varies from one franchise to another. But how do franchisers determine how much to charge for it? In their book Achieving Wealth Through Franchising, authors Robert Justis and William Slater Vincent say the franchiser considers his costs of recruiting, training and helping the potential franchisee throughout the life of the agreement, among other things, when deciding on his initial fee. Responsible franchisers are always able to justify their fees; some even go to the extent of telling you the exact number of streamers and flyers they will give you to promote your store. However, there are no hard-and-fast rules for determining the initial fee, so it’s up to you to decide if it’s worth paying.
Preoperating expenses. These are the costs that the franchiser projects you will have to shoulder before you can open your store, and they include your permits, the uniforms and salaries you will have to provide your employees while they train, the security deposits, advance rentals, initial inventory and operating capital. A responsible franchiser will easily walk you through these expenses, since he has had years of experience in opening branches himself. Again, decide if you can afford these expenses before signing the franchise agreement.
Ongoing fees. These are the other costs to consider in franchising. As a franchisee, you will have to pay for them throughout the life of the agreement.
Royalty fee. This is the money you pay weekly or monthly based on a percentage of your gross sales. It ranges from 3 percent to 10 percent.
The royalty fee is what makes it possible for the franchiser to provide continuing support to franchisees and to support the expansion of the franchise. Theoretically, the higher your sales, the more you pay your franchiser, so the more money he collects to support your store and the entire system. However, “The royalty fee should reflect the worth of your franchise and the maturity of the franchiser,” says the book Achieving Wealth Through Franchising.
Advertising fee. Like the royalty fee, the advertising fee is a percentage of your gross sales, and it varies from 3 percent to 6 percent depending on the maturity of the franchise system you have bought into. The franchiser uses this fee to promote the system and to create brand awareness.
Other fees. These include training, recruitment, management, renewal, transfer, auditing, accounting, testing, site selection and other fees.
Assessing the cost of the franchise is critical before you sign on the dotted line. “It is important to determine if the fees charged by the franchiser you are investigating are comparable to the other franchise systems,” says the book Achieving Wealth Through Franchising. “If they are significantly higher, then you need to investigate further and ask the franchiser why.
For example, your franchise system might charge more fees because it provides more goods and services. If you do not need these added extras, look into other franchise systems within the industry that require payment of lower or fewer fees, because it provides fewer and less comprehensive goods and services.
To know more about franchising, you may want to download a copy of the book Is Franchising For You? This is available in either Amazon.com or iTunes.
