Buy a Franchise
Colette Bell, co-founder and vice president of franchising for Ace Handyman Services, shares key insights on overlooked costs, ongoing fees, and FDD sections crucial for home service franchisees.
Investing in a home service franchise can be an exciting and profitable endeavor, but understanding the financial commitments involved is critical. The Franchise Disclosure Document (FDD) outlines essential details about the investment, yet many prospective franchisees overlook key costs that can impact profitability. Colette Bell — co-founder and vice president of franchise development at Ace Handyman Services — shares insights into the most important financial considerations.
When reviewing startup and ongoing expenses, it's easy to focus on the major costs like franchise fees and marketing contributions. However, smaller recurring expenses can add up over time, particularly technology-related fees. "Check out the software costs thoroughly,” Bell said. “While they should all be listed in Item 6, sometimes — if software is a per user cost — they only list in Item 6 the opening number of users, and as the business grows, you could see significant increase in technology fees that you weren't prepared for."
Every franchise comes with a set of recurring fees, including royalties, marketing contributions and technology costs. While these fees support the franchise system, they also affect the bottom line. A well-structured home service franchise should allow franchisees to cover these expenses while still maintaining strong profitability. "A home services model should be strong enough on the gross profit line to provide a franchise owner with plenty of ability to not only pay the royalties, marketing contributions and technology fees, but have a healthy net margin left over after that," Bell said.
Initial investment costs vary depending on the franchise model and operational requirements. One key consideration is whether the franchise can be run from home or requires a physical location. "Some home service franchises allow franchise owners to start their business from their home,” said Bell. “This lowers the start-up costs of an outside office, but may limit the ability to obtain a Google pin for the service business to have strong SEO and visibility on the web. You should also check into requirements for home service franchises to require workers drive company vehicles. As you grow, this requirement could become costly."
Franchise candidates should review the FDD in detail, particularly sections outlining financial obligations and operational requirements. Certain sections may reveal unexpected costs or obligations. "All concepts, home services or otherwise, should carefully review Section 11 specifically for computer and equipment requirements and training provided by franchisor," said Bell.
Financial performance data provided in Item 19 can help franchisees gauge potential earnings, but it’s important to assess the scope of the data. "You should take a deep dive into the Item 19 starting first with how many franchise owners were there at the end of the prior year and how many are included in the Item 19,” Bell said. “You want a significant portion of franchise owners to be included in the Item 19 to avoid a 'rosier' picture than realistic."
For many prospective franchisees, the FDD can be overwhelming. One of the most frequently asked questions involves the extensive list of ongoing fees. " This is the list of 'ongoing' fees a franchise owner may face,” said Bell. “Some of these are regular, such as royalty, marketing fund and technology fees, while others are only if something happens, for example an audit. The Item 6 can be long and sometimes causes worry to a candidate that there are more regular charges than they anticipated, which may or may not be accurate."
Since franchise agreements are legally binding and involve long-term commitments, seeking professional advice is essential. "We always recommend they seek legal review and information to assist them in understanding all the commitments outlined in the FDD,” Bell said. “While Ace does not make any changes to our agreement, we welcome the opportunity to discuss any topics in more detail with the candidate to ensure they understand and are comfortable with the provisions."
Understanding the financial aspects of a home service franchise before signing an agreement is crucial to long-term success. Carefully reviewing the FDD, accounting for ongoing expenses and analyzing potential earnings can help franchisees make informed decisions and set themselves up for profitability.
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