Ray Kroc, founder of McDonald’s, once said: “The only thing you need to start a business is a customer.” While there is great truth in that statement, it is hardly the whole story. Many people are eager and able to buy franchises. They are your potential customers. But before you, the new franchisor, can get from Point A – having a business that will attract such people – to Point B – being in a position to find them and offer them a franchise – a good deal must happen.
Two principal questions related to franchising confront the new franchisor:
1. “How much money will I need?”
2. “Where will I get it?”
As a first step to answering these questions, you must answer two others first:
1. “How much cash do I have that can be spared for this program?”
2. “What can I use for collateral should I decide to seek financing?”
Franchising can be a lucrative business, but, as the saying goes, it takes money to make money.
So when you think about the cost of franchising your business think first about the risk versus potential reward. Then think about all the things to be done if you’re going to do it right. And finally, think about how many of those things you need to do even if you don’t franchise. You know, deep down that you really should have a Business Plan – a road map that tells where you are going, how you intend to get there, and what your expectations should be in sales, costs and profits. You know you would really like to have everything you do documented into a manual – even if it’s only to be used by employees.
For this blog post, we will talk about how long it would take and how much the entire project would cost. Stay tuned for the next blog post, we shall talk about the necessary documents and the steps you and your consultant will need to put together thoroughly to produce a comprehensive franchise program.
For the first year after taking on the project, a responsible consultant will be available to advise and assist in the implementation of the Client’s franchise program and to supply useful information concerning current practices in the industry and franchising in general.
If this sounds like a lot of work, it is. Generally speaking, the entire project should take about six to eight months and should cost between $100,000 and $150,000. But your expenses don’t end there. You’ll need outside legal help and an audit for your new corporation. You’ll also need funds to print your brochure and Operations Manual, to advertise for franchisees, for travel and for working expenses. If you plan to file in registration states, there are individual filing fees for each state. All told, you’re probably looking at another $30,000 to $60,000 for these items. Of course, a reputable consultant will probably allow you to pay by instalments over a one-year period. In addition, some of your costs (such as franchise advertising) will not kick until the program itself is completed and necessary state registrations have been filed – probably in the ninth, tenth or eleventh month.
We have done out best not to sugar-coat the cost issue. We believe this to be a realistic assessment of what you’ll need, what it will cost, and how long it will take. Can you build another company-owned unit for this amount? And even if you can will you be likely to lose money the first year with a manager running it, break even the second year, and really not make any money until the third year?
View that scenario against selling just ten franchises the first year at $40,000 each and thereby collecting $400,000 against minimal costs. Remember, the franchisee pays you a franchise fee of $35,000 to $50,000, puts up all the money to build and operate the unit, come to work for you in training for one to two months and pays you a royalty of 4 to 10 percent of sales. Even companies like McDonald’s, KFC, Taco Bell and Pizza Hut are selling off company-owned units to recoup their cash, eliminate the day-to-day management headaches and permit more rapid expansion.
This post is an excerpt of our compreshensive franchising ebook that explains the concept of franchising and its development process. Learn more about franchising development and gain valuable insights for free.