You get what you pay for: A new way of thinking about the cost of a franchise

scalesHave you ever wanted to buy something you were excited about, so much so you justified the cost, even if it didn’t make sense from a cost/benefit perspective? And, have you ever bought something on which you spent all of your discretionary cash, but then you had no funds to maximize the enjoyment of that item (e.g. you end up eating McDonald’s in Italy)? It happens to all of us at some point in both personal and professional settings. If you are pursuing a franchise opportunity, however, this behavior can turn a great thing into something you would like to shove in a closet and never mention again.

To avoid turning your franchise dream into a cast-off, it helps to first understand the true costs and benefits of being awarded a location(s). If you are only considering whether you can afford the franchise fee and initial projected investments, you are missing some major components of a diligent review of the opportunity. Here are a few tips to improve that diligence and to increase your understanding of the cost/benefit structure:

  1. Have the franchise developer explain the franchisor view of the franchise fee.  Is it just the cost to use the brand in a certain market? What do you get in the startup process once you pay that fee to set you up for longer-term success? Certainly you are pursuing the franchise because the brand and opportunity appeal to you, but try to dig deeper to see if the fee is only a pay to play to participate with the brand or is only viewed as the entry-level investment of a partnership.
  2. You should certainly review and understand investment ranges presented in FDDs, but it wouldn’t hurt to ask other franchisees in the system regarding their initial investment or question the franchise developer as to how those ranges are collected and calculated.  You should also perform an independent review with vendors to ascertain estimates of costs yourself.  And go Sherlock in your attempt to uncover hidden costs! This is not meant to imply that franchisors are willfully hiding costs, but every business has costs (e.g. state regulations) which might not be apparent on the surface.
  3. Finally, invest the time to understand any royalties, recurring fees, or cyclically driven costs of operations which are part and parcel with the opportunity. You should at least be able to sustain those as your revenue generation ramps up. And please, please ask questions about break-even and timeframes. This tip takes us to a bigger discussion, one of costs versus investment.

I have seen many people focus on whether they can afford the franchise fee and initial costs.  Sometimes, they even convince themselves they can make the lowest number in the investment range work. They then plan to stretch their finances to either cover that lowest buy-in point or they don’t acquire additional capital in support of anything beyond that low buy-in point. This is not a path that you want to go down, nor should you pursue a franchise opportunity with a franchisor who doesn’t match your financial bandwidth nor cares whether they do. Sweat equity is great, but it won’t completely make up for a capital deficiency. And capital is not just about covering your costs; it is about investing beyond the costs to maximize your experience and achieve success more quickly and/or with less professional AND PERSONAL strain. Just like you don’t want to eat McDonald’s on your dream trip to Italy, you don’t want to buy something you then don’t have the capital to invest in a growth-oriented proposition. And the stakes are much higher on the downside than eating hamburgers in Italy. Therefore, let’s shift your viewpoint a little to set you up for success.

You need to shift your diligence process from buying a franchise to one where you see yourself as an investor in a system. How happy are other investors in that system? What was their cost/benefit and risk/reward mindset when they invested initially, and how do they view things now? Does your franchise developer speak in terms of investment and partnership? This is the language an investor should use or recognize when trying to find an opportunity that will build them not break them. May you find that franchise opportunity which matches your dream!

Leave a Reply