Veechi Curtis - Small Business for Dummies

Before buying any franchise, find out what the initial fee pays for, and ask yourself whether you think this fee is worth it. Also, find out what the ongoing fees are and what they pay for. (Even lawn mowing franchises often provide web-based technology that helps with booking, scheduling, invoicing, credit control and so on, all aimed at maximising franchisees’ money-making time.)

How many people around you recognise the brand? Do you think the brand is essential to the success of the franchise? Do existing franchisees think the fees are worth it? If the brand isn’t well known, your money may be better spent researching your own business plan, finding out what successful competitors are doing and creating your own marketing materials and campaigns.

The cost of buying into a franchise isn’t just the upfront purchase price. Almost all franchises also involve ongoing fees such as royalties on sales, marketing levies or fees for IT services. You also have to factor in all the regular start-up costs that any business start-up involves, such as legals, working capital and opening stock. Consider the following:

What’s included in the initial fee? Fees can vary from $0 to $700,000, not including shop fit-out or equipment, depending on the franchise. Find out whether this initial fee includes training, sample products, initial marketing materials and so on.

If not included in the quoted figure, how much are the additional start-up costs? Don’t underestimate how much starting up a new business costs, especially if you’re planning a retail franchise. Figure 3-2 shows an initial budget for a simple bookkeeping franchise — you can see how the costs for even a simple business such as this mount up. Retail franchises incur costs for additional big-ticket items such as specialist equipment, premises fit-out, vehicles and working capital.

How are ongoing royalties calculated? Find out whether royalty payments are fixed or variable. On the one hand, fixed royalties have the advantage that you know what you’re up for; on the other hand, variable royalties are easier going if business gets tough. If the rate is variable but substantial, ask yourself how sustainable this franchise model is likely to be in the long term.

How do marketing levies work? Almost two-thirds of franchisors charge ongoing marketing levies. The Franchising Code of Conduct requires that these levies are kept in a separate account and that franchisors provide audited statements to franchisees as to how this money is spent.

What other ongoing fees should you expect? Many franchisors charge ongoing fees for IT services, and some franchisors even charge ongoing fees for training. You need to factor any ongoing fees into your business plan and profitability models.

What about early termination fees? If things go belly-up, what are the consequences?

The franchisor has to supply you with a full disclosure document, a copy of the Franchising Code of Conduct and a copy of the final franchise agreement at least 14 days before you make any payment that isn’t refundable.

FIGURE 3-2:Your total start-up costs involve much more than the initial purchase price of the franchise.

Part 2

IN THIS PART …

Build a business that can stand on its own two feet.

Understand your business environment and where the risks and opportunities lie.

Maximise your chances of success with a proper business plan.

Pick a legal structure, find out about trademarks, and learn about contracts.

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