Entrepreneurs often expect certain fees when they first purchase their optimal franchise. Everyone knows that there are initial financial requirements and a franchise fee that must be paid and is typically unrefundable. Likewise, most people are aware they must pay royalties back to the franchisor as they operate. However, a number of other expenses lurk in franchise deals, expenses that can surface as unpleasant surprises unless you are ready for them.
If you buy a franchise that requires a property, storefront, or office, how will you get one? The solution for most franchises is a sub-lease arrangement, where you pay to use a store space that the franchise has already leased. This sub-lease works much like a normal lease and requires regular payments. On the other hand, you may be required to lease your own property directly from a landlord. Either way, this is a steady stream of money flowing out of your pocket for the ability to use a property.
2. Vehicles and Equipment:
Many franchises require a certain kind of vehicle, or at least some type of specialized equipment. So whether you need a van, truck, laptop, or dishwasher, you need to purchase these necessary assets. The franchise will not hand you any assets to use – the most they will give you is branding materials. So make room for buying pricey assets like vehicles when budgeting properly for a franchise.
3. Marketing Fees:
Yes, the franchise will supply you with plenty of marketing materials to use, and may even training you on how to participate correctly in marketing campaigns. But they will not do it for free. In addition to general royalties, expect another percentage to be skimmed off your profits for marketing frees, typically 2 to 3 percent. There is no guarantee you will see the direct results of this money, since it often goes to general market research. Some companies, however, are willing to set up funds for individual franchisees to draw from when they need to spend money on local advertising. Contracts can vary considerably.
4. Working Capital:
Working capital should be an expected necessity when first starting, but it can still come as an unpleasant shock. You need a stream of cash to pay for business utilities, employees, inventory and other operational costs, even when first starting out. This can be a large drain on capital, because you will probably not make much profit for your first months or even your first years in the business. Remember to include all working capital needs in your calculations.
5. Miscellaneous Contract Fees:
Franchisors may charge an assortment of fees during negotiations and contract processing. These fees may be small, but can add up over time – and some may be recurring. Watch out for lesser known fees like management fees, processing fees, legal fees, and similar costs. They are a necessary evil, but do not need to come as a shock.
6. Certifications and Insurance:
What type of certifications does your business need? Depending on what state you live in, health and food industries require a number of certifications for you to legally operate. Accounting, home inspection, education…many industries have various certifications you will need to earn. They may also have unique forms of insurance to protect clients. Try to earn certifications before starting the business, and ready yourself for unexpected insurance fees, too. The franchisor may pay for some of these costs, but most will fall on your shoulders.
7. Exit Fees:
What happens when you want to leave the franchise? Is it allowed? Franchisors often charge exist fees if you try to leave a franchise before your contract ends. If you decided you want to take your entrepreneurial talents elsewhere, prepare a sizable amount of cash to pay for the ability to exit the franchise early…or bide your time.
Andrew Ewing is a professional blogger that shares tips and advice about franchising topics. He writes for FranchiseExpo.com, a leading franchise directory.