Firstly, because you’ll need to have a good understanding of how much working capital will be required while your operation reaches break-even, and secondly because even with the most comprehensive franchise disclosure documents there are going to be hidden or unexpected expenses that can threaten your success.
Related: Sizing Up Your Franchisor
Here are some numbers gathered from operating franchisees that you might (or might not) be prepared for.
What kind of money is involved in becoming a franchisee?
Of 174 respondents who answered:
Average monthly expenses excluding wages and rent are:
- R1 511 –fee for merchant’s association
- R684 – security
- R356 –fee to landlord for marketing
- R111 – Parking
- R9 189 – utilities
- R444 – miscellaneous
- R1 682 –rates and taxes.
The average percentage of gross profit of surveyed franchisees in the last financial year was 32,6%.
How long will it take for you to break even?
- 37% said more than a year
- 21% said up to six months
- 16% said seven to 12 months
- 41% of respondants did not know or did not answer.
Mistakes in any business can represent real money — and avoiding them can make a big difference in the total investment you need for your new business and ultimately how profitable the business becomes.
Franchise companies will almost certainly have manuals, training programmes and other support documents and services designed to help you avoid making costly mistakes. The challenge is that most new franchisees are trying to learn and execute many new things at once and sometimes make what they feel are logical decisions without remembering or consulting all the advice provided by the franchisor.
It’s always a great idea, during your due diligence conversations with existing franchisees in the system, to ask them if they made any expensive mistakes when they were building their new business. A good form for this question is, ‘Knowing what you know now, what would you do differently if you got to start all over again?’
Related: Lease Negotiating Like a Pro
Some of the most common answers seem to come up all the time and affect the following areas of the business:
Most franchise businesses operate out of leased space, typically in a retail environment. The total cost often represents one of the largest investments you make in setting up your business. A number of economic factors are involved in the negotiation of a lease that can make a big difference in your total costs.
The first is the base rent. You want to get this factor as low as possible in the beginning (with escalation clauses in future years), but try to get at least three to six months of free rent at the beginning, when you’re not making any money.
You also need to carefully evaluate and include common area maintenance and taxes — these can sometimes be larger than the base rent.
Construction and fixture costs
Most new franchisees assume that build-out costs are what they are, and it doesn’t make much difference who your general contractors or subcontractors are. This can be an expensive assumption. You’ll often hear from existing franchisees that they should have used competitive bidding before contracting for their fixture construction.
Many franchise businesses require the purchase of extensive capital equipment. You’ll often hear existing franchisees say 1) they should have shopped more vendors to find the best prices, 2) they should’ve considered buying used equipment, or 3) they should’ve considered different financing options (loans or leases) to conserve their capital for other business needs.
Inventory and supplies
Though the initial inventory and supplies aren’t usually as large a purchase item as the other examples, they can be. If you’re looking at a franchise with significant inventory investment needs, make sure to ask the franchisor if they’ve learnt any way to save on these costs. This can also raise your margins on an ongoing basis.
Almost every new franchisee will tell you that they wasted a bunch of money with their initial marketing efforts. The franchisor is usually quite specific in laying out a marketing plan for you to follow — complete with budgets. Don’t fall prey to advertising sales people doing their best to convince you that the plan the franchisor has put together (based on successful experience with many of new unit openings) is flawed.
Related: Blunders to Avoid
Make sure you are confident that the franchisor has the experience to help you put together an initial marketing plan that will work — and then follow it to the letter.
The largest ongoing expense for almost all franchise businesses is the cost of labour. All good franchise companies will have specific guidelines for what personnel you need and how much you can afford to pay for these positions. It takes discipline and focus to stick to the plan in terms of labour, but it can make all the difference to the long-term success of your business.