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SBC Team

Franchising 101 (Part 3)

Posted by SBC Team Nov 5, 2007
Know the Costs

A franchise offers the security of an established brand, but it may come at a steep price

You've decided to step up and become your own boss, but you still want a well-established corporate name to provide your new business a little extra security. So you've decided to purchase a franchise. But how much will that cost you?

 

The answer depends largely on what will be required to get the franchise up and running. For example, some franchise operations can be run from your home, in which case there will be no need to purchase or rent a location. However, if you plan to open a popular franchise store, restaurant, or coffee shop, you are looking at considerable initial cost in addition to whatever franchise fee the franchisor charges.

 


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The franchise fee is the upfront investment in the franchise and gives you the use of the franchise name and its products or services. Fees vary from as little as $2,500 to more than $50,000. While that may sound low, keep in mind that the franchise fee is almost incidental when factoring in all of the other costs associated with opening a franchise, including the following:

 

1. Percentage of Sales
In addition to the franchise fee, most franchisors demand a percentage of your profits, assessed on a periodic (usually monthly) basis. This is the royalty fee for using the franchise name. Domino's Pizza, for instance, charges its franchisees 5.5 percent of weekly sales in addition to its $25,000 one-time franchise fee, and requires additional fees from franchisors for its regional advertising campaigns. In exchange for these fees, and depending on the franchise, you will receive access to marketing and training materials, the right to operate your franchise in a specified geographic location (without competition from other franchisees), training, and other support from the franchisor. To find lists of popular franchises for sale, their startup fees, and the expected minimum investment amounts associated with each, go to franchising.com, franchisedirect.com, or thebusinessmarket.com.

 

2. Rental or Purchase of Location
Some franchisors will help you find a location for the business; others expect you to do that on your own. In either case, you will be expected to pay for the rental or purchase of the location. Some franchisors will help you find financing, if you qualify; most won't. Be warned, some franchisors are very exacting about the appearance of their franchise locations and will demand to inspect and approve your choice of storefronts before finalizing the agreement. To learn more about the franchise experience and read ratings and reviews from folks who have already taken the plunge, check out franchisebusinessreview.com.

 

3. Necessary Products or Equipment
Finally, there will be the cost of acquiring any products or equipment associated with your franchise's operation. This can become quite expensive, depending on the franchise. When considering which franchise opportunity to explore, all of these costs must be taken into consideration. For example, tanning franchisor Desert Sun calculates that, in addition to its $50,000 franchise fee, a franchisee can expect to spend between $193,000 to $388,000 to acquire the needed tanning beds, UV-Spray booths, neon signage, marketing materials, satellite music, lotion, insurance, and cleaning equipment. The Athlete's Foot, a popular sports shoe vendor, estimates a total cost of between $196,000 and $446,000 to open one of its shops, inclusive of storefront, supplies, and equipment costs.

 

Similarly, Ben & Jerry's estimates that opening one of their Scoop Shop franchises will, depending on its location, cost somewhere between $198,000 and $385,000, once all costs, including their $32,000 franchise fee, are counted.

 

Barriers to Entry
The cost of opening a store can be so great that many franchisors set specific financial requirements that would-be franchisees must meet just to be considered for a franchise agreement. Ice cream giant Carvel charges a $30,000 franchise fee to open a full Carvel store, but the cost of purchasing the property and equipment are such that the company will only consider franchisees who can demonstrate a net worth of at least $300,000, with at least a third of that available as liquid cash. The greater the cost of starting up a franchise, the higher the financial requirements will be. Bally's Total Fitness gym franchises will only consider franchisees with at least a combined $800,000 in assets; the International House of Pancakes (IHOP) demands a minimum combined net worth of $1 million and $300,000 in liquid assets.

 

There are, however, less expensive franchises out there. Jackson Hewitt Tax Service says its franchises can be established for between $48,000 and $92,000, including fees. Rival Liberty Tax Service franchises cost even less, estimated at $33,000 to $60,000. RE/MAX real estate franchises run between $25,000 and $200,000, depending on how you operate the franchise. JAN-PRO commercial cleaning franchises cost a remarkably low $4,000-$50,000 to start, again depending on the size of the operation. With more than 2,300 franchises available in the U.S., there are a wide variety of franchise opportunities at almost every level of financial investment.
SBC Team

Franchising 101 (Part 2)

Posted by SBC Team Nov 5, 2007
Do Your Homework

Before you jump into a franchise agreement, be sure you've done extensive research on the franchisor

You want to start a business, but you also want to avoid the risk associated with an untested idea. You've decided that you want the advantages of an established name, and can live with the detailed rules and prescriptions of a franchisor. Now how do you choose a franchise that best fits your talents and interests?

There are literally hundreds of franchises available in almost every major consumer industry. Fast food retailers like McDonalds, Burger King, Wendy's, Carvel, Dairy Queen, and Dunkin' Donuts may be the most familiar, but franchise opportunities exist in industries as diverse as tax preparation, computer repair, medical billing, home renovation, interior design, commercial cleaning, home health care and nursing, and health and fitness. According to FranchiseConsultants.com, there are more than 2,300 franchises currently available in the U.S. In fact, there are so many franchise opportunities available that the choices can be bewildering.

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According to Mike Duessler, a Boston-based business consultant, the choice of franchise begins with you. "You need to find something that you are comfortable doing," he says. "And that may be different from what you think you'd like to do." Duessler suggests taking a job in a similar type of establishment, or even at an outlet of the franchise you are considering before you invest in your own store. "You may think that running a coffee shop is a lot more interesting than that nine-to-five office job you currently have," he warns, "but if you've never run a coffee shop or any type of shop before you may find your expectations are really far off the mark." The more familiar you are with the type of operation you are considering the better off you will be when choosing between franchise opportunities. Working at an outlet of the franchise you are interested in also gives you an insider's perspective on how the franchisor operates. "Do they provide support to their franchisees? Do they provide quality products? How strictly do they regulate their franchisees? The best way to get a firm answer to these questions is to work inside a franchise and see what goes on every day," he adds.

 

Once you've narrowed down the type of franchise in which you'd like to invest, how do you choose between the various franchise offerings in that field? There are a number of considerations, according to Michael Klein, a franchise attorney. "Look for recognizable names, since they will draw the most customers," he says. "Chances are, if you've never heard of the franchise, most of your potential customers won't have either." The more recognizable the franchise name, of course, the higher the initial investment will likely be. "Still, a well known name usually means a track record of success," Klein says. "Or, at worst, it will make researching the franchise's problems easier since bigger names get more media attention."

 

When researching any prospective franchise, look for any past litigation, especially from former franchisees. The presence of litigation against a franchisor isn't necessarily a sign that the franchise isn't worth pursuing," Klein says, noting lawsuits are commonplace for large businesses. However, watch for large numbers of similar type lawsuits, which could reveal a widespread problem with the franchisor's behavior.

 

The most important item in determining whether a franchise opportunity is a good deal for you is the Uniform Franchise Offering Circular (UFOC). The Federal Trade Commission (FTC) requires that a franchisor provide any prospective franchisee a copy of its UFOC within ten days prior to the signing of any contract, or at the first face-to-face meeting between franchisor and franchisee. The UFOC is a standardized disclosure form that describes the franchise in considerable detail, including all policies and requirements applicable to franchisees. The UFOC also must provide audited financial statements from the franchisor and copies of the franchise contract. "Take your time reviewing the UFOC," advises franchise attorney Mario L. Herman. "Compare the claims made in any promotional materials the franchisor has provided against the financial statements in the UFOC and ask about any discrepancies." Herman also suggests contacting current franchisees listed in the UFOC and inquiring if they would invest in the franchise again. "Of course, if they are current franchisees, they may not be inclined to speak negatively of the franchisor, but they may still offer useful information," he adds. Additionally, Herman advises trying to locate former franchisees to ask why they left the franchise. Herman suggests contacting the FTC to see if there have been any complaints filed against the franchisor.

 

Be sure to look for Part III of this article, which will explore the financial realities of the franchise business and offer realistic assessments of the cost of entry associated with the various business franchise categories.

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