The Blog

All Posts in Category: General Franchising

financial questions

Key Financial Questions to Ask When Buying a Franchise

As you begin the process of researching potential franchises to buy, hundreds of questions are likely to be circulating in your head, many of them related to money. Here are several financial queries that you must absolutely ask before buying a franchise.

What’s the total investment I will be expected to make?

This is the question that really needs to be at the top of your list because it will immediately help you narrow down your list of franchises that are feasible options for you. Because you expect that your investment will eventually reap rewards, you may be tempted to justify expanding your budget to accommodate more expensive franchises than you had previously considered: don’t. Treat this experience like shopping for a house or a car. Set a maximum limit, and eliminate franchises that require you to make an investment that is beyond that amount.

How much cash is required?

It’s vital to know how much in liquid assets will be required by the franchisor early in the process because the answer can vary so significantly. In fact, the percentage of your investment that you must have in cash can range anywhere from 0% to 100%, depending on the franchise in question.

What do I receive for these costs?

You’re spending a significant amount of money to invest with the franchisor, so you deserve to know exactly what that money will yield you even before your company begins to earn revenue. For instance, does the franchise fee cover an on-site training period at the company headquarters? Are certain essential materials and equipment included in the start-up costs?

How are your royalty fees structured?

Royalty payments are something that almost every franchisee will have to deal with, but the types and structure can vary greatly from company to company. Some franchise companies levy an all-inclusive franchise royalty fee, while others split them up into different percentages to fund departments such as marketing, advertising, etc. Additionally, you will want to know how often each fee is assessed, and whether it is a fixed payment, percentage of sales, or another amount.

Are there any discounts or promotions available?

Many franchise companies, especially if they are part of larger networks, will offer specific discounts in order to attract potential franchisees. These may include discounts for qualified veterans, minorities, first-time franchisees, or those who are looking to open in a specific region.

Do you offer any assistance with financing?

Some franchisors may be able to work with preferred lenders to help you secure financing, while others will require you to navigate the process on your own.

When can I expect to reach my initial goals?

First, you need to decide on an initial goal. Whether it’s for the company to break even, reach a specific benchmark for growth, or hit a certain revenue target will depend on your specific type of business and situation. Then you need to ask the parent company how long it will likely take you to reach that goal, using specific examples provided by other units in the system.

How financially healthy is the parent company?

Many potential franchisees are concerned about the expected revenues and costs for their own location, but they forget to scrutinize the financial health of the corporate organization. Your franchisor is going to be your partner in this endeavor, so make sure they are financially stable enough to offer consistent support.

What are the lowest- and highest-performing franchises in operation?

Knowing this will help you get an idea of the best- and worst-case scenarios for owning this franchise. It will be even more informative if you can also see the low- and high-water financial results for the franchise units that closely resemble your target market.

Next Steps

If you’re considering a franchise investment or just have questions, feel free to contact one of our franchise specialists to learn more about the process and all the different franchise opportunities by completing our request form or calling 1-877-650-5551.

Franchisor Fees

Understanding Franchisor Fees

There are many incredible benefits to investing in a franchise business, but those benefits do not come without their costs. From up-front fees to payments that are tied to specific timetables or events, most franchisors have several different fees that they request to support the resources used by the corporate company on behalf of the franchisee.

It’s important to keep in mind that this is by no means an exhaustive list of any charges they franchisor may levy on the franchisee. Any franchise agreement must be carefully reviewed to illuminate any fees that will be charged, as well as what the franchisee will receive in accordance with said fees.

Start-up franchise fee

Most people with a passing knowledge of the franchise model are aware of the start-up franchise fee. This payment is typically made by the franchisee to the franchisor at the time that the agreement is finalized and the franchise license is granted. More often than not, this initial fee is made as a one-time, lump-sum payment, although it can sometimes take other forms.

Generally, the start-up franchise fee is made to the franchisor in return for a commitment to supplying the goods, processes, and intangibles that the franchisee will need to get the business operational. This can include things such as:

  • Branded materials
  • Proprietary equipment
  • Site identification expertise
  • Recruiting tools
  • Training manuals

Initial franchise fees vary from brand to brand, and the amount is usually determined by the extent of the capital commitment from the franchisor to the franchisee.

Brand license fees/royalties

Many, although not all franchisors, will also assess royalty fees to each of their various franchisees. These royalty fees are also known as brand license fees, and they are ongoing payments made by the franchisee on a pre-determined schedule, most likely quarterly or annually.

Royalty fees can take many different forms and be configured in multiple different ways, so it’s vital for any prospective franchisee to carefully examine the section of the agreement that outlines on-going payments and compare them with comparable franchises. They are often calculated as a percentage of gross revenue, but some companies choose to mandate an additional mark-up on each product sold that gets set aside for the franchisor. Additionally, they can be set at a fixed percentage, or the percentage may fluctuate to account for seasonal periods, market fluctuations, or other phenomena.

Advertising/marketing fees

Franchisees benefit significantly from the regional, national, or even global advertising apparatus of the parent company, so it’s not a surprise that they’re asked to offset some of the associated costs. Advertising fees are most often assessed as a percentage of sales, similar to royalty payments, but they can also be charged as a specified amount. It’s important for franchisees to remember that for most companies these fees go directly to the national or regional advertising costs, and franchisees are expected to cover any local advertising needs on their own.

Additional considerations

The fees listed so far are the most common charges a franchisee can expect to encounter, but they are not the only ones. If the franchise agreement is a contract set for a specific period of time, the franchisor may assess a renewal fee should the franchisee opt to continue. In the event that a franchisee wishes to sell their business to someone, the franchisor may choose to levy a transfer fee as a part of the agreement. Additionally, franchisors may have stipulations to assess additional fees for situations such as new technology implementation, or retraining initiatives.

Next Steps

If you’re considering a franchise investment or just have questions, feel free to contact one of our franchise specialists to learn more about the process and all the different franchise opportunities by completing our request form or calling 1-877-650-5551.

investment

Service Franchise = Lower Investment Cost

Opening any type of franchise comes with myriad different associated costs, but the total amount you spend to open and operate the business can vary wildly depending upon the specific circumstances. One of the most important factors that will determine how much you end up investing in the franchise is whether you choose to open a brick-and-mortar (also referred to as retail) franchise or a service franchise.

Upfront franchise fees

Many times, although not in all cases, upfront and annual franchise fees will be lower for service businesses than they will be for retail franchises. To understand why that is the case, it helps to break down the concept of franchise fees by what you are actually paying for. There is, of course, relationships with global suppliers and pre-negotiated price agreements, access to patented operational processes, potential corporate legal assistance in the event of disputes, etc. But by and large, the bulk of franchise costs are determined by the power and recognition that the parent brand has with the public, and how important that brand identity is to the company’s ultimate success.

For restaurants and retail franchises, this brand recognition is usually what gets people in the door. That’s what often makes franchise costs for these businesses significantly higher when compared with the average service franchise. That’s not to say that brand identity isn’t important to service franchises, only that consumers tend to have stronger brand relationships with businesses that sell tangible goods.

Real estate concerns

The old real estate adage, “Location, location, location,” doesn’t just apply when you’re trying to buy or sell a home in a hot market; it has a major impact on costs for business as well. For many brick-and-mortar franchises, the physical location of their store is one of the most important determining factors in the amount of revenue they will earn. These types of companies often rely heavily on foot traffic, benefit from being near other commercial properties where their customers will be running errands, or receive a steady base of visitors due to being located near an important residential hub. These locations are typically very attractive in the market, and franchise businesses usually pay the price in the form of higher leases.

Service franchises, on the other hand, typically don’t suffer as much from being located in a less prime location. Many service companies operate without having any customers ever walk through the door, and therefore the location of the actual office is a low-level concern. Others get the bulk of their visitors from customers with appointments and don’t have to worry about making money off impulse visits. in any case, you can usually lease office space for your service franchise in a less expensive area and still be successful.

Operating costs and inventory

Owners love to open retail franchise businesses because the market for physical products is vast and diverse. Physical products also cost money, both to manufacture and to house. Retail franchise owners learn to deal with operating and inventory costs because they don’t have a choice, but in many cases, it has a dramatic effect on their operating margins.

Meanwhile, service businesses generally don’t have to pay for equipment that is used in manufacturing processes, the material used to produce the products or wages for the people who do the manufacturing. They have to make sure that office supplies are stocked and that any tools necessary to complete the services (both digital and analog) are in good working order, but the cost commitment is generally much lower when compared with brick-and-mortar franchises.

Next Steps

If you’re considering a franchise investment or just have questions, feel free to contact one of our franchise specialists to learn more about the process and all the different franchise opportunities by completing our request form or calling 1-877-650-5551.