Video Transcription

We’ve been discussing the different general types of cost that a franchisee has to incur and that he or she must look at before purchasing a franchise. Looked at initial fees or cost, the fixed fees. We’ve looked at ongoing royalty payments, and we’ve looked at advertising fees. We really haven’t examined them, but we’ve identified them. The first group of cost that I’ll like to look at a little more carefully has to do with your initial and ongoing cost. The ongoing being the royalty. And I’ve written down several questions that I usually ask a franchisee when they call. And looked back through some of my conversations over the last year and I have several issues that I wanted to share with you regarding assessing the initial fees and the ongoing cost. And I’ve written these down so it may look like I’m reading a bit, but these are from our firm’s experience.

The first has to do with the advertising payments. And these break up into local and national. You could have a local fees where the franchisee is able to go out and hire his own advertising people, radio stations, because arguably, he knows his market best. In most franchises, he’ll know what his people are like that live around him in that purchase. So him buying the local advertising is probably the most efficient way to go. So a franchisor understands that, many of them, and they’ll require a certain proportion or a certain fixed fee of cost by a franchisee on local advertising. There’s also a break that could be called cooperative advertising, and there’s also a break that could be called national advertising. And we’ll get to those shortly.

You could have grand opening cost. And these are a lotta costs that franchisees don’t figure in into their business plan. And these can run several thousand dollars and more. After you have your grand opening, you wanna have an initial opening advertising campaign, and that could require radio…as I say, TV in certain markets. And a lotta times, the grand opening fees are not identified by the franchise, or in an offering [inaudible 00:02:16] or an FTD. And franchisees don’t take ’em into account many times when I look at their business plans. And these, as I say, can be significant. They can run from $5,000 to $10,000. And franchisees who are running on a razor, that can really throw ’em off right from the very beginning.

You’ve gotta look at business and operating costs as well. There could be licenses that are required, there could be issues that arise with healthcare that where there’s senior care franchises and there could be certain licenses and permits that are required with respect to that. There could also be building permits which is a very easy issue. However, it could cost payments to zoning lawyers and things of that nature. And it could be a wait of six months to a year. So those costs can be monetized and you need to add those in as well. There need to be assessments of the product or service supply costs. You need to look at whether there’s gonna be a competitive market in those upstream supplies. If you’re a restaurateur, you need to look at your food supplies, your paper products, things of that nature. Obvious things. But a lot of franchisees don’t necessarily put those down specifically and list each of the supply cost, and that’s very important.

There are also real estate and leasehold cost. You need to look at how much you’re gonna be charged per month obviously with respect to a lease, or if you’re gonna purchase the property, how much your loan payments are gonna be and things of that nature. You’re gonna have to look at computer cost, and those can be a very large component. And many times franchisors will require a franchisee to purchase the product, the computer system, from franchisor. And many times those systems are overpriced and they don’t work properly. That’s a different issue. The question is how much that product is gonna cost. You are also gonna have ongoing maintenance and tech support that are needed for that computer system, which is vital. So you’re gonna need to factor in those costs as well. You’re gonna have to look at training costs. A lotta times franchisors will require that the franchisee purchased training services from the franchisor. Those are many times, again, either overinflated or useless. And if the franchisee wants to prevail in the market, he’s gonna need to recognize that he needs to go and get training, and supervision, and advice from other professionals or other people in that market who have worked there. That’s also a very tangible direct cost that needs to be factored in.

There’s also the concept of legal fees, but I think everybody knows the pain of that. But it’s crucial and necessary. There’s financial accounting advice that we’d spoken about before. If your books are in bad shape, franchisor, when you’re in a dispute, will come in and examine the books and tell you the books are inadequate and start probing and asking questions, then you’re gonna end up paying more to get some type of forensic accountant for yourself to come in and try and figure out what you did with the books or not. And a lot of times the account will be a check on the franchisor’s, on the franchisee’s cost accounting and things of that nature.

You also have insurance, your various kinds of insurance for any business. And those costs can vary vastly based on who you call in your geographic area and the type of franchise you’re in. So using a benchmark for those is really not a good program. What you need to do is shop around as you would for any of these costs to find out how much insurance would be. A lotta times franchisees will say, “Well, I don’t need insurance on the building,” or something of that nature. It’s all kinds of liability insurance and things that you may not have thought about that you need for your business. And luckily with insurance companies, it’s not in brokers, you get the advice for free somewhat, but you end up paying. However, there are different policies, and liability limits, and things that you need to explore.

There are costs of health insurance if you got employees or even yourself, those need to be factored in. You’ve got employee salaries and benefits. This goes to another issue whether you can operate the place by yourself or through management. And many franchisors will require that the franchisee himself or herself participate directly and operate the location. I’ve actually had franchisees that have gone through the whole purchase process and started operating and have never sent a manager to training, and the manager has no experience. And what happens is the franchisor on a visit, on an inspection visit, finds out that the franchisee is not there personally, and the franchisee can be many times terminated just for that violation.

Thanks for being with me today. And if anybody has some questions, feel free to give me ring. Thanks again.

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