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Franchise Opportunities:
Due Diligence + Costs
Here is a brief overview of five basic things you need to investigate when choosing a franchise:
The Franchise Systems' Products or Services:
- What is the company offering?
- How well-priced is it? How is it promoted?
- How to they operate?
- How does the company service its customers?
- How does it deal with product development?
The Franchisor:
Identifying Stronger Franchisors:
- What is the reputation of the franchisor both to the public and to other franchisees?
- What is the drop-out rate for new franchisees along with their reasons for leaving the franchise?
- What is the financial position of the franchisor and can you gain access to their financial information?
The Franchise System:
Key success Factors that differentiate strong franchise systems
- How does the franchise choose sites and how well have those choices been made?
- How does the franchisor screen its franchisees if at all?
- What level of financial return, if any have the franchisees received during the first 3-5 years?
- How closely and effectively does the franchisor work with the franchisees?
- What is the relationship between the franchise's suppliers, banks, key service providers and the franchisor?
Financial Commitments:
Evaluating Your Total Investment
- What is the total investment in the start-up phase?
- How is the royalties' set-up, when are they paid, and under what terms can they be increased?
- What amount of capital investment is expected with respect to the ongoing upgrades and site modifications that may be requested by the franchisor?
- Does the franchisor have special bank services arrangements with Canadian charter banks?
The Franchise Agreement:
What to review with your legal counsel?
- What protections are there for you and the franchisor with respect to the operation of the franchise: training, agreement modification and termination, inventory control, notification of site upgrades, and staffing requirements?
- Are there any debts that the company has whereby the franchisee is obligated to participate in paying?
- What protection is there with respect to sales territories, the location of new franchisees with the same franchisor?
*(source: www.thejournaloffranchise.com/art/articles.cfm?id=66)
Franchises: Costs
There are different costs associated with buying a franchise.
Typically, you would pay:
- An upfront franchise fee of on average $5,000 to $50,000 and can cost in the millions depending on the type of franchise
and the industry
- Ongoing *royalty fees of 5-10% of sales
- Cost of purchasing or leasing a site/space to run the business
- Inventory and equipment - these costs are not included in your upfront franchise fee
- Operating funds to pay staff
- Money for advertising (some franchisors ask for additional money for promotion - do you research!)
*basically this is the cost of benefit from the company's product/service reputation, the company's infrastructure and
some of its promotional efforts
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