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Franchise startup costs: where to find savings

By FranChoice Blog | Jul 3, 2019

franchise startup costs

When you’ve signed on the dotted line and you’re a brand-new franchise owner, it’s time to think about franchise startup costs. You might be surprised to hear that the biggest money-wasting startup cost is really just part of human nature: impatience. Most new franchisees are understandably excited to get to the ribbon-cutting and open their business. When presented with multiple options they choose the speedier one, which usually comes with a higher price tag. But when several expensive (but speedy and convenient) options are chosen, the cost adds up. And in many cases, the time gained doesn’t produce enough long-term value to offset the increased cost. You’re likely wondering how to solve the cost vs. speed quandary. The answer is simple: balance. Don’t lean too far to the cost-saving side or the speed/convenience side of the fence.

There are several common expense categories that most startup savings fall into. “Time is money” applies to most of these areas. Here’s where to look for savings:

Lease terms

This category of franchise startup costs can bring significant savings, so it’s wise to gather expert advice. Consult a good commercial real estate agent and an experienced real estate attorney familiar with the local market. All leases are negotiable to some extent, but through skilled negotiating you may be able to obtain significant concessions. With your realtor and attorney, you can determine what’s standard in your marketplace in terms of variables like the costs per square foot, the Common Area Maintenance (CAM) charges, free rent periods, construction allowances, and other terms. Then you’ll have a point of comparison as to whether you’re getting a good deal.

Construction costs

Most franchises require a physical site that needs to be prepared according to specifications. There are a two basic ways to save money here. First, get multiple bids for work that needs to be done. You’ll be surprised at the cost variance you’ll see between contractors. Second, put some thought into DIY. What might you be willing to do yourself in order to save money?

Equipment, signage, and fixtures

This category of franchise startup costs represents a significant expense for most franchises. Again, it’s worth your time to get multiple bids on everything. In terms of your equipment, think about buying used components. Some franchises will not allow that option, but most will allow you to source and purchase used equipment as long as it meets particular guidelines. Ask your franchisor about good sources in the area.

Insurance

A lack of sufficient insurance coverage could bring down your business, so it’s best to get as much business insurance as you can reasonably afford. Sit down with your insurance broker and have them shop around to get the best deal. There can be surprising differences in rates for the same coverage by different insurance providers. Increasing your deductible is one option to reduce your premiums. But make sure your deductible is not so high that it would be unaffordable for your business if you had to make a claim. Upgrading your location with fire alarms, sprinkler systems, and/or security systems can make you eligible for insurance discounts. The lower your risk from the insurer’s point of view, the lower your premiums are likely to be.

As a final thought on this topic, remember that it’s not hard to determine which areas will produce the most savings, whichever franchise you select. All you need to do is ask current franchisees. The time you’ll invest in making these contacts will be an investment that can pay big dividends in startup savings.

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How to find a strong franchise: here’s your checklist

By FranChoice Blog | Jun 26, 2019

great franchise

If you’re looking for a business opportunity, seek out a strong franchise. If you’re wondering what to look for, here’s a checklist of 10 things that indicate a reputable franchisor.

Cooperation during the investigation process

When you’re researching a franchise, you should expect a professional and responsive reaction to your inquiries. This is the “courtship” phase of the relationship. So it doesn’t bode well for your future as a franchisee if you encounter frustration and delayed answers to your requests.

Direct operational training

A high-quality franchise delivers training that covers all the operational knowledge that franchisees need to successfully deliver the product or service. In addition to reviewing information the franchisor provides on this topic, be sure to ask current franchisees how well the training prepared them to run their business.

Additional training

A strong franchise will also provide more general training about running a business. Examples of topics include employee and payroll issues, theft protection, and vendor relations.

Marketing programs

Here’s another area to ask current franchisees about, in addition to reviewing the information the franchisor provides. Do the franchisor’s marketing efforts build and maintain a sufficient customer base to support the business?

Real estate and construction assistance

Many franchises require site selection and build-out according to particular specifications. A strong franchise will provide assistance with steps such as finding a good location, negotiating a lease or purchase agreement, designing a layout, and/or supervising general contractor.

Financing assistance

Many franchisees need to finance part of their investment in the franchise business. Though few franchises provide financing directly, some will pave the way for franchisees. This could mean offering a standardized business plan template or even having vendor relationships with prospective lenders.

Minimal litigation history

It’s common for a franchise company, especially one that is well established and has a large number of franchisees, to have a litigation history. But, the shorter this history, the better. Carefully examine the litigation disclosed in the Franchise Disclosure Document (FDD) to gather clues about how the franchisor deals with conflict. A pattern of excessive litigation constitutes a red flag for any franchise opportunity.

Financial strength of the franchise company

Look for a franchise with a strong and profitable financial status. And make sure to examine the audited financial statements in the FDD or have them reviewed by an accountant. That’s the best way to make sure the company is likely to stay in business and meet its commitments to franchisees.

Strong unit economics

Typical franchisees in a reputable franchise system should get a reasonable return for their unit operations within a reasonable period of time. Though this may be challenging to confirm, it’s an essential component of a great franchise.

Happy franchisees

The overwhelming majority of franchisees in a strong franchise system are happy with their business. They’re satisfied with the training and assistance programs, the marketing efforts, and the financial results they achieve.

When you find a franchise that scores well on each of these items, you have found a reputable franchise. This should put your mind at ease as you move forward in the process.

 

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