You’ve probably heard the term “turnkey” many times and may have wondered what it means in terms of franchising. Turnkey franchises, or turnkey franchise packages, are one that provides absolutely everything you need to start the business; it’s all already done for you.
On the surface, this sounds like a great idea for a franchise model: You pay your initial franchising fees, and the franchisor researches the physical location (if needed), signs the lease, builds out the unit, supplies you with start-up inventory, finds and trains the staff, and orchestrates the grand opening. All you have to do is “turn the key” to open your new business.
And that convenience is on top of the already numerous benefits that come from the franchise business model:
- Established brand recognition and customer base
- Proven business model
- Initial training programs and ongoing training support
- Marketing support
- Customer service management tools and systems
- Operational best practices
- Supply chain process is in place.
All of this is ready for immediate operation after you pay the entirety of the initial investment and sign the franchise agreement.
Can it be too good to be true? If you’re not careful, it definitely can be. Read on.
Buyer Beware: The Pros and Cons of a Turnkey Franchise
There are advantages and disadvantages to a turnkey franchise. While it can save you work and aggravation, it may involve unnecessary expenses if the package is overpriced for what it offers.
Let’s explore ways to evaluate the value of a turnkey package.
Not a real turnkey business
Most franchisors offer only a “partial turnkey” program, performing some but not all of the tasks necessary to get the business up and running. They might only offer “site selection” but not actually make any real estate investments on your behalf, or fail to include other initial crucial expenses like the initial marketing materials, operational assistance, vendor connections, and more, unless you pay an additional fee. Make sure you’re clear on exactly what they will help you with and what tasks you’ll need to tackle yourself.
Initial Turnkey Franchise Investment Number Seems Too High? It Probably Is
You should expect to pay a reasonable price for the labor involved in putting the package together, but not an outrageous price. If the price seems high, ask for a breakdown of the services provided and, as always, pore over the Franchise Disclosure Document (FDD) for every detail.
Check if the Savings from Franchising are Worth It
Collective purchasing power is a benefit of franchising. You can expect to get a good deal on the supplies and inventory needed for the business since you are taking advantage of the buying power of the supply chain process already in place. Make sure you have an understanding of the savings.
Ask Current Franchisees About Turnkey Model
Ask current franchisees about the value of the turnkey package. Be sure to cover this topic thoroughly when you call franchisees during your due diligence process. Ask them if they feel they got a fair value for the turnkey package from the franchisor team and whether the process went as smoothly as they expected.
Finally, remember that you are paying a large up-front franchise fee and substantial ongoing royalty payments to this franchisor. These are the accepted costs of a franchise business that will give them their established brand awareness, proven operational systems, business plan, and even supplier relationships.
Nonetheless, you should not have to pay a large markup to put the turnkey package together. Take the time to understand all facets of the process and the associated costs.
Variations on the Typical Turnkey Franchise
There are always exceptions to the rule. Some franchisors do not charge ongoing royalties but rather make their profit by selling you the components of their franchise.
For example, a smoothie franchise may sell you their proprietary kiosks and ingredients rather than charge you a royalty fee. This franchisor’s profit will come from the markup on the products they sell to you.
Again, you should expect a fair price. The best way to determine if the price is fair is to ask the existing franchisees. Ask whether they are satisfied with the prices they are charged and if they shopped around before signing with the franchisor to see if this was the best deal.
The Way of the Future?
As franchising becomes more and more sophisticated, many franchisors are offering a partial or full turnkey package as their franchise opportunities. They understand the benefit of providing their franchisees with every possible advantage and maximizing their chance at success.
With retail franchise concepts, the franchisor will likely provide the equipment and fixtures to the franchisee. The franchisee will then hire a local contractor to assemble and install everything. This balances the need for a consistent “look and feel” with the ability to control costs.
A Necessary Ingredient For Success
A true turnkey franchise is in a “condition ready for immediate use, occupation, or operation,” according to a strict definition. In most cases, a franchisor will do some but not all of the work to get you up and running. You will still need to take care of a number of start-up tasks yourself.
Whether a business is turnkey or not, remember that there is one element of the equation that a franchisor cannot control or provide – the drive, talent, and determination of the franchise owner. The good news? That’s all in your control.