Cost Considerations When Franchising Your Business
Is now the right financial time to take the next step?
Before you break out the calculator and start working with pivot tables in Excel, you should know there is a lot that goes into franchising a business that a simple dollar amount. If you’re thinking about franchising your business concept there are many costs to consider.
“Franchising is an investment,” said Bill Paige, vice president of marketing for Francorp. “There is not an average fee to franchise a business. Everyone who franchises their business does it a littler differently with different upfront costs. There will always be an investment in franchising.”
Even though franchising is an investment, it’s a great way to expand a business without needing to have the capital for expansion right away. Franchising helps business owners avoid the overhead and brick-and-mortar costs of opening new locations.
“There is less financial risk as a franchisor,” said Rick Robinson, president of Services4Franchising and CFE. “The franchisees are the ones signing the lease and having to get liability insurance. There is also lower overhead because you’re not putting up the capital. Also, sales will increase as the local owner is doing everything so there is more urgency and dedication.”
If you’re thinking about franchising, it’s important to make sure it’s the right business model for your brand before you invest in the concept. Just because franchising can help expand a business, it doesn’t mean it will be the best fit for your financial long-term goals.
“You have to make sure you have a viable business,” Steve Beagelman, president and CEO of SMB Franchise Advisors. “The business should be growing and have strong economics. You should make sure the business is not so unique that it’s not impossible to replicate, if it only works in a tourist market and not anywhere else it may not be the best decision to franchise.”
Robinson recommends trying to figure out if you can train someone to run your business as an owner and to make sure there are systems in place that can be replicated. If there is too much cost involved in training and running a franchise, it may get too expensive and you may not be able to sell a franchise.
If your ready to make an investment and expand your business through franchising, make sure to account for these additional costs when you look over your finances:
Hiring a franchise consultant
There is a lot that goes into franchising a business, and hiring someone with a background in this can help save a business a lot of time and money.
“There is a cost with franchising a business. You can try to do it yourself, but a consultant knows how to do it,” said Beagelman. “To file a Franchise Disclosure Document (FDD) with the Federal Trade Commission (FTC) you need to include a lengthy questionnaire that needs to be filled by a franchise attorney. A lot of franchisors don’t know the franchise cost territory, terms and trademarks, and we will fill out the questionnaire with the attorney since they don’t know how to answer it.”
Preparing an FDD with a franchise attorney
According to the FTC, every franchise needs an FDD to do business. This is a lengthy document with many specific sections that have to be put together in the correct way. And according to Beagelman, hiring a franchise attorney to put an FDD together can run anywhere between $15,000 and $30,000 depending on the attorney.
Creating an operational manual
“In addition to the FDD, you need a very detailed operations manual that you will train the franchisees on,” said Robinson. “It’s a business in a box. You will have access to it on a daily bases. And how they will open, run and build a business.”
The operations manual is essential because it includes everything that will be required for daily operations.
Trademarking your brand name
“One of the first things you should do is trademark your business name,” said Beagelman.
You may think you’re the only one with your name, but as your company expands you will want to make sure you have the legal use of it and you will want to protect it against any intellectual property issues.
Beagelman suggests using a franchise attorney to help with this step.
If your franchise is in one of the 14 registration states, a business will need to have an audit of the franchise company in the first year of the FDD. For this you will need a CPA to complete the audit, and there is a cost that is associated with that.
If you’re not in a registration state, you can postpone the audit until the second year of the FDD.
“A big cost that goes into franchising is marketing,” said Paige. “We give them a marketing plan, we give them vendors, but we can’t reach into their pocket and make franchisors understand the importance of marketing. A lot of people won’t put money in marketing. In the first year, people don’t follow through when they are cutting corners and cutting time and thinking they can get by.”
The marketing plan should also include how a franchisor plans on finding prospects and include the costs of making people aware that you are franchising.
Just like running any business, there are administrative costs to consider. Make sure your allocating enough funds for the day-to-day operations of your franchise, which includes salaries.
Paige recommends that franchisors make sure to include joining associations in the budget. Joining associations is a great way to connect with the community and other franchises, but it costs money.
Don’t forget about your franchisees. When you’re getting a franchise off the ground it’s important to spend time with your new franchisee to make sure everything is running according to plan.
“There will also be travel expenses to consider,” said Paige. “You need to service your franchisees as you develop them and have a field representative to see people. There will also be travel expenses to consider.”