The Franchise Opportunity. Part 1 of 5: Franchise Fees

Many dream about owning a business of their own one day. Some of those dreamers have taken the necessary steps and made their dream a reality. Many of those who stepped out into the entrepreneurial space have realized great success. They have also realized great personal satisfaction and a real sense of accomplishment that comes with business ownership. After all, there is no better feeling than to succeed at building your dream.

Unfortunately, not every dreamer realizes success. Some have lost everything they own because they chose to chase their dream. There are many reasons why some succeed while others fail. Some have a great business mind, are very good at picking the right product or service to offer and know how to negotiate the best prices when it comes to supplies, materials, and lease agreements. Others are great people with great passion, but they just don't have what it takes when it comes to running a business.

Those wannabe entrepreneurs who just don’t believe they have what it takes to run a successful business may view a franchise as the best option. A franchise will most likely cost more at startup but the proven operating systems of the franchise could be well worth the investment. Having key systems already established can take most, not all, of the guess work out of the equation. A franchise may be ideal for those who want to jump in and get going right away.

However, before jumping in feet first you must understand that not all franchises are created equal. Franchises are only as good as the people who developed, maintain, and lead the franchise. A strong franchise will have strong operating and marketing systems in place and an even stronger system to train and support franchisees. These systems will have been tested, redeveloped, and made to work as flawlessly as possible for those who follow the plan.

Before you pull the string on a franchise you may want to ask some very pointed questions.

Franchise Fees

• What are the true start up costs? Don’t solely rely on the FDD. The FDD may not include all the little things that will add up as you build out the business. Speak to existing franchisees to find out the true cost. Some franchisors have been known to lowball the FDD to lure franchisees. Do your due diligence.

• What are the ongoing franchise fees? Royalties add up and take away from cashflow. Know the fees you will be asked to pay weekly and monthly. Most charge anywhere from 5 to 8 percent in royalty weekly. Some will also add a technology fee and marketing fee. This can bring total royalties paid annually to a significant number. Paying a royalty for a great concept that has been proven to cashflow is fine if you are making a good return. Nobody wants to work hard only to receive a pittance on the time and money invested. If you do not have the potential to earn 15 to 20 percent after the royalty is paid you may want to ask yourself if it is worth it. How can you determine this before deciding? Talk to existing franchisees. Ask to see their P&L. Not all will grant you this request, but you will be surprised by how many will. In confidence of course.

• Are franchise fees and Royalties locked or can they be increased? You might think that you’ll only pay a franchise fee once, which is usually at the initial signing of the franchise agreement. However, if you love the concept and are doing well you may wish to invest in another location. The same is true for royalties. Are they locked? Is it clear in the franchise agreement that they are locked? There’s nothing more frustrating than getting a notice your royalty is increasing by a percent. One percent may not sound like much, but every percent adds up over the course of a year and the life of an agreement.

• How long is the franchise agreement term? You should pursue an agreement that is at least 10 years with an option to renew at the end. Why invest all that time and effort to build a business and a brand within a market only to lose the rights to it to someone else or the franchisor at the end of the term? Lock up the term and the rights to the market. You want to be in control when it comes to extending the agreement for another term (granted you are in good standing).

While you can't possibly know every cost associated with a franchise business, there are ways to get as close as possible. The above questions are a starting point for digging deeper into the true cost. Don’t simply rely on the FDD or a written response from the franchisor. Ask those who are like minded and already involved. That is usually where the true cost to own and operate lies.

Up Next Part 2 of 5: Operating Systems

Randy Stepp is a Principal with Renaissance Leadership Group. RLG is a full-service medical practice and business development firm committed to helping owners achieve long-lasting success and sustainability.

Visit Renaissance Leadership Group at www.renaissanceleadershipgroup.com to learn more.