Ask an ExpertMarch/April 2018

Q. As a prospective franchisee, what should I know about start-up costs?

There’s no doubt about it…

Opening a successful franchise business, like any other start-up small business venture, comes down to successfully budgeting how much money you’ll need to get started, before you can ramp up quickly and successfully. When investigating any franchise opportunity, a serious small business owner must give careful consideration to all the start-up costs associated with starting his or her business.

Proper research of required capital will help you in the immediate and distant future

Absolutely the last thing you want to do is underestimate and run out of money. When it comes to this part of your decision-making process, please don’t let emotion rule the day. Proper research and a calculator are much more effective!

Discover start-up costs in the Franchise Disclosure Document

The first place to look is the Franchise Disclosure Document (FDD), where very good franchisors will outline all the start-up costs associated with their business model. Use that section of the FDD as your guide to budgeting, but don’t simply take their word for it! Confirm the list of costs in the FDD by speaking with other franchise operators to get their actual numbers.

Gain access to the franchise brand with the franchise fee

With any franchise business, one of the most significant items you’ll budget for is the franchise fee. Nothing good comes free, and the franchise fee is your ticket to use the recognized brand and successful and proven business model created by that franchisor. This is the way most successful franchise companies cover their own cost of finding and working with the best candidates – like you! It’s important to find out clearly and exactly how much the franchise fee is when researching any franchise opportunity.

Lawyer up with a reputable franchise lawyer

Of course, as with any business start-up, to open your franchise, you’ll invest in a good franchise lawyer to help you navigate through the franchise agreement, and a trusted accountant to help you set up your financials. It’s essential that you find a lawyer who is experienced in working with franchise agreements, as this is a specialized field. Hopefully, the franchisor has a national relationship with an insurance broker who has a specialized program created for that franchise network. Budget some money for that.

Account for inventory, permits, licences, and rent

Depending on the business, you’ll probably need to set some money aside for permits and licences, too.

If your business is a mobile franchise, vehicles will be essential to your start-up. That said, even if you have a retail store, you may need to invest in sales or delivery vehicles, too. Retail or restaurant locations will also require a substantial investment in equipment and store build out. The franchisor will certainly have a very specific design and equipment list, and should be able to provide you with a very accurate estimate for this expense. Don’t forget to include some money for down payments to the utility companies, as well as first and last month’s rent to the landlord, too!

Pretty much any business is going to require an initial start-up inventory. For this one, it’s especially important to take direction from your franchisor. They know exactly what kind of opening inventory you’ll need. Please don’t skimp on this investment. You don’t want a customer to walk through the door of your brand new business and see skimpy inventory! A robust inventory makes your business look great.

Your franchise will never succeed without a significant marketing budget

Finally, no start-up cost is more important than your marketing expenses. Your franchise can’t properly grow without allocating a significant amount of your start-up costs to marketing. To be safe, your budget should include at least enough to account for marketing your business for the first six to 12 months. Nobody understands this better than your franchisor, so take your direction from them. Over the years, the franchisor has learned what works and what doesn’t, and will give you great advice on how to successfully budget for this. You may have fantastic experience in marketing, but take the franchisor’s plan and apply your knowledge and experience to that. You have invested in this successful franchise business. Let the experience and knowledge of a successful franchisor work for you to help you ramp your business up as quickly as possible.

So, do all the due diligence necessary to make an informed and educated decision. Utilize the information you find in the FDD and the knowledge of the franchisor to help you be as successful as you can be, as quickly as you can. Budget successfully, and include at least 10 per cent more money than you need – just in case!

John Ferracuti
Bin There Dump That