HOW TO FRANCHISE?

Launching a new business can be expensive. Becoming a franchisee and launching a franchise-based business involves additional costs. As you create your budget and determine how much capital you’ll need to get your business off the ground, Watch Out!

Upward of 84 percent of all small business loan applications are initially declined by lenders, often because of poor presentation and improper completion of the necessary applications and paperwork. here are some of the major expense categories you’ll need to consider.

■ Franchise fee: This is the initial fee you’ll pay to the franchisor to become a franchisee. Depending on the type of business and the franchisor, this fee can be anywhere from a few thousand dollars to over $1 million.

■ Royalties, licensing fees, and ongoing franchise fees: In addition to the initial franchise fee, this expense category includes all the ongoing fees you’ll need to pay the franchisor. Depending on the type of business, these fees will be called things; however, they’re usually based on a percentage of either revenue or profit that your business generates.

■ Lease (real estate): The monthly cost associated with leasing, renting, or purchasing the real estate from where your business will operate.

■ Marketing and advertising: One of the ongoing fees most franchisees are required to pay the franchisor is for ongoing marketing, advertising, and public relations on a /national basis. This fee goes, for example, toward building overall brand awareness.

■ Required purchases: This expense category refers to the ongoing purchases you’ll to make in order to operate your franchise. These purchases can include everything from inventory to employee uniforms.

■ Training costs: Depending on the franchisor, you may have to pay for training materials (or additional training beyond what’s initially offered to new franchisees). This expense category might also include outside training you opt to pursue, plus the added expense involved with training your employees.

■ Startup costs: There are many expenses involved with establishing a business and getting it up and running. You’ll begin to incur these expenses long before your business begins to generate any revenue or profit. (A partial list of start-up expenses can be found in the following bullet list.)

■ Living expenses: During the period when you’re working full-time on the establishment and operation of your franchise-based business, but that business is not yet generating any revenue or profits, your personal living expenses will need to be covered. It’s essential that, as a franchisee, you set aside enough money to maintain your style of living, even when no regular paycheck is coming in. The period of time this will be necessary can be twelve to eighteen months, and sometimes longer, depending on the type of business you’ll be running.

■ Other costs and fees: Being a responsible business owner means being prepared for the unexpected. Having adequate capital on hand to deal with unexpected problems and expenses is essential. As you’ll read several times throughout this book, being undercapitalized as you’re establishing your franchise-based business is one of the most common mistakes first-time franchisees make, and it’s one of the leading reasons why new businesses fail.
In addition to the fees listed in the previous section, some of the initial start-up costs and fees you’ll most likely be responsible for include the following.

■ Employee payroll: The salaries and benefits you’ll need to pay your employees, starting from the day each person is hired.

■ Grand opening expenses: The costs involved with any special promotions, marketing, advertising you utilize in conjunction with your grand opening. The cost of giving away product samples or free gifts to customers should be calculated into this portion of your budget.

■ Insurance: No matter what type of business you’ll be operating, it’ll be necessary to have insurance. Be sure to consult with your franchisor and several insurance companies about the type of insurance that’s necessary, as well as the amount of coverage you’ll require.

■ Inventory: The costs associated with establishing and maintaining the inventory for your business.

■ Leasehold improvements: Any construction you do to your location to prepare it to meet the requirements of your franchisor will fall into this category. This might include adding store fixtures, painting, lighting, flooring, making interior or exterior renovations, and so on.

■ Legal and accounting: As soon as you decide to become a franchisee, you’ll want to hire a franchise attorney and accountant (CPA). The costs associated with hiring these experts need to be incorporated into your overall budget.

■ Licenses and permits: This expense category includes the fees associated with acquiring any and all licenses and permits required to open for business.

■ Local marketing, PR, and advertising: In addition to the ongoing fee franchisees pay to the franchisor to cover marketing, PR, and advertising on a national/regional level, as a franchisee looking to generate local business, you’ll need to establish a budget to handle these tasks on a local level.

■ Office equipment and supplies: Depending on the type of business you’ll be opening, this expense category can include everything from computers and telephone equipment to paperclips and business letterhead.
■ Signage: Interior and exterior signage is an important pro- motional tool and is a necessary expense for many types of franchises, particularly retail-based businesses.

■ Taxes: As a franchisee, you’ll be responsible for paying a variety of different types of taxes, based on the type of business you’ll be operating. Paying your taxes late, not properly filing tax information with the IRS, or miscalculating tax payments can all lead to serious financial penalties and problems with local, state, and/or federal authorities.

■ Training (including travel and lodging): Even if all necessary training is included within the franchise fee paid to the franchisor, as the franchisee, you’ll typically need to pay your own travel expenses (airfares, lodging, meals,rental car, and so on) for the trips you take to the franchisor’s corporate offices or training facilities. You may also be required to purchase training manuals, videos, audio programs, or other supplies for yourself and your(future) employees.

■ Utilities: Gas, electricity, water, Internet access, and telephone service are among the monthly utility bills your business will most likely incur. If your business is operating from a mall or shopping center, for example, in addition to the utility bill for your own location, you’ll probably be responsible for paying a portion of the common areas’ utility bills, such as parking lot lighting.

■ Working capital: The day-to-day operations of a business cost money. In addition to all of the expenses listed here, keeping your business running will involve a wide range of other expenses you need to be able to cover, including taxes.