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. We 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. There’s also a question of your financing. Where’s that gonna come from? Whether it’s gonna be an SBA loan, you wanna examine that issue way before you determine that this particular franchise is for you. There are certain franchises that are on an SBA list that SBA will not finance, based on the prior problems they’ve had with the franchise or on the failure rate. So, that’s also some more information that you can get, but you need to go down to the local bank, your regional bank, your SBA lender, or call the SBA itself and see what the parameters are of possibly borrowing money. The interest rate could be prohibitive. The amount of money could have a cap on it. The requirement that you put, personally, a certain of money into the business before a loan will be extended. Those are all issues that you need to determine upfront.
And as I said before, you also need to look at your own savings. If you were having to go six months rather than two months without any income, where would you obtain the money to be able to simply pay the bills or exist, yourself, your own personal expenses? And in that regard, you’d also wanna put in your own personal business plan, you need to determine how much you’d need annually to be able to exist by yourself. Other issues that are more personal, that a franchisee needs to consider in purchasing a franchise are whether you’re interested in that particular field. Many franchisees are lured to a particular franchise based on the promises of profits and they have no background or even interest in the franchisee. That’s a bad way to start, and I recommend against using that as a sole criterion as to whether something is profitable. Many times, you’re gonna be there yourself, and your family and your relatives are gonna be there yourselves for many, many hours a week, and if there’s something that you don’t enjoy doing it’s really gonna be a major detriment to the successful ability of your business.
The other question is how many hours can you work a week, which is a related issue. I’ve had some franchisees that have budgeted in, say, 40 hours a week or 50 hours a week, and they actually end up working 100 hours a week. Again, you’re gonna find out from prior franchisees, but you still need to determine how many hours you can work and over-budget for that particular issue. The other issue that we discussed that you need to determine is where you’re gonna operate it yourself or use a manager. Many times, franchisors don’t permit you to operate through a manager. And even those that do, there could be very substantial fixed costs for salary issues, for benefits for that person, and there’s also the issue of training for that person. And there’s also many issues that are generic having to do with being an off-site owner, and so you need to determine that upfront. It’s not as easy as saying, “Well, we’re just gonna get a manager to go with us for training, and the guy has some experience in the past in this industry so everything should be fine.” This is an issue that you really need to parse out, and cost out and consider seriously before you purchase a franchise.
There’s also the issue of how many outlets you wanna have. How many stores? How many restaurants? If you think, in a particular area, that it’s gonna be a successful concept and you don’t want other franchisees coming in and usurping all the good will that you’ve created, you wanna have the option or the right of first refusal on additional franchises. And it may be that you include in your agreement that you’re permitted to purchase any franchise within 100 miles of your franchise, or 50 miles depending on the type of franchise, and that’s something that you need to consider as well. There’s also the issue of whether you’re gonna be an area developer, which is a gigantic franchisee in many senses, and whether you’re gonna be the one who has the right to develop a particular state, or two states or a particular county. If you feel this is gonna be successful and you’ve got the finances to support it, you wanna be the one who takes a particular area, and introduces and benefits from the introduction of that product or service.
Thanks for being with me today. And if anybody has any questions, feel free to give me a ring. Thanks again.
