How Much Does a Franchise Cost?

How Much Does a Franchise Cost? The answer to this question is not very simple. Every franchise has its own financial requirements, so the costs to start a franchise are different for every franchise company. In most cases, you will be required to pay a franchise fee, all build-out costs for your location (including furniture, fixtures and equipment), professional fees, contractor fees, signage and inventory. The franchisor does not contribute to any of these costs. 

Here is a list of 6 common costs to open a franchise:

1. Franchise Fee

Every franchise company will require you to pay an initial franchise fee. Most franchise fees are between $20,000 and $50,000. In some cases, you may see franchise fees less than $20,000. These franchises with lower franchise fees are usually home-based or mobile franchises. 

The franchise fee usually covers the cost of training, support and site selection. The items or benefits that are included in a franchise fee are different for every company. In some cases, the franchise fee is just an upfront licensing fee for the rights to use the franchise name. I strongly suggest you investigate exactly what you are getting in return for the franchise fee.

2. Legal Fees

Anyone considering buying a franchise should consult with a franchise attorney. Your franchise attorney will help you review the UFOC (Uniform Franchise Offering Circular) and the franchise agreement. There is no one set fee to review these documents. It is safe to say that you should budget anywhere between $1,500 and $5,000 to pay to a franchise attorney. The amount of time you spend with your attorney will determine the overall price.

3. Build-Out Costs

It is almost impossible to estimate a price for build-out costs since each and every franchise is different. Once you have decided on a franchise and a specific location you will be giving an estimate from the franchisor of your overall build-out costs. This will include all furniture, fixtures, equipment and signage. 

Of course if you decide to buy a home-based franchise there are no build-out costs involved. You may have some other costs for software applications or computers but sometimes these items are included in your franchise fee.

4. Inventory

If you are buying a retail franchise or any other franchise that you are selling a specific product you must stock up on inventory. Once again, every franchise is different and has different requirements. You may be required to buy between $20,000 and $150,000 worth of inventory.

5. Supplies

All new businesses require you to have the proper supplies to run your business. Whether it is a food franchise required to offer plastic utensils to its customers or a service-based franchise that is in need of office supplies, every franchise needs the proper supplies in order to do business. Your franchisor should be able to give you an accurate estimate of what is needed before you open your franchise.

6. Working Capital

Working capital is in the amount of day-by-day cash available to a business. Depending on the type of business, it is important that the working capital cover a particular length of time, ranging from a few months to possibly two to three years until the business is in full swing. The franchisor typically provides an estimate of the amount that is needed.

Source: www.ask.com 

Franchising and Innovation: Can the Two Go Hand in Hand?

Franchisors, what they're looking for in a good franchisee, and, more than just having previous experience or knowledge, franchisors are likely to stress an ability to follow a system. After all, it's common knowledge that at the core of any franchise's success is a tried, tested, and perfected system which is then duplicated over and over again. But what if a franchisee has an idea for a new product or a better system of efficiency? In such a well-oiled machine, is there room for innovation? 

And when there is leeway, does that end up benefitting the whole system? Finally, can the role as franchisee be satisfying to individuals who like to innovate and have a bit more control? We decided to put the issue on the table and asked experts and franchisors, alike, to weigh in on this age-old debate. "Some franchisees, and some franchise systems, are more effective when franchisees can innovate," says John Hayes, a franchise consultant, former franchisee and franchisor, and author of several franchise-related books. "More often, however, when franchisees have to search for answers or experiment, the results are likely to be frustrating and quite often the franchisees lose money. Innovation belongs to the franchisor and it's the responsibility of the franchisor." 

However, that's not to say that innovation on the franchisee level hasn't happened successfully. In fact, it's thanks to franchisees that the infamous McDonald's Big Mac and Filet-O-Fish even exist. And its franchisee input that was the driving force behind Domino's Pizza's new American Legends pizza line which launched this year as well as its new line of breadbowl pastas which was developed and tested by a Los Angeles franchisee. "We encourage ideas and innovation from the whole system - and we put many of our franchisees' ideas into operational practice," says Mike Mettler manager of Franchise Development at Domino's Pizza. 

At WSI, an internet consulting franchise, innovation is so highly valued that an international excellence and innovation conference is held annually to recognize franchisees who have provided internet marketing solutions in their local markets around the world. In addition, Ron McArthur, president of the franchise, personally meets with the top 30 revenue producing franchises eight times a year to discuss ideas. And 90 percent of the products and services within the WSI e-marketplace have come from franchisees. "New franchisees are trained on the basics of business but innovations are introduced on a quarterly basis to ensure that we are offering the latest and best internet marketing processes to end clients that deliver results," says McArthur. 

But in a franchise system, the right to suggest new ideas is most likely something to be earned. It comes with time and usually only after a demonstrated ability to follow the system at hand. "Most good systems don't want new franchisees to even think about innovations until they learn the existing system inside out and prove that they can execute it like a star," says Jeff Elgin, CEO of FranChoice Inc., a network of franchise referral consultants. "At that point, they have become successful, their base is secure, and they have earned the right to consider innovations." 

At Toppers Pizza, a 26-unit eclectic pizza delivery franchise brand, franchisees are very much involved in product development since they are the ones working with the customers on a daily basis, according to Scott Iversen, Director of Advertising & Franchise Development. However, that doesn't eliminate the fact that a franchisor/franchisee relationship is a partnership with a certain amount of hierarchy. "At the end of the day, when a decision is made, [a franchisor] wants a franchisee who is going to ‘carry the banner' for the brand and support the direction," says Iversen. "People who are great compromisers make great franchisees. People who always have to do it ‘their way' are generally not well-suited to be a franchisee." 

For existing franchisees who have a new idea that they'd like to implement, Elgin recommends first identifying the person at corporate who is responsible for receiving such feedback. Present the idea early on before spending any time or money developing the idea because, as Elgin says, "many of the ideas a franchisee comes up with will already have been proposed by another franchisee." 

There's an old adage that says two heads are better than one. If that's true, then it naturally follows that hundreds or thousands of people can make one system run better than just one. But be sure to first research what policy the franchisor has in place for accepting new ideas and then, only after you've demonstrated that you can follow the system at hand, introduce your idea. Because, when it comes to innovation, not everyone sees it in the same light.

Source: www.redhotfranchises.com

Forecasted Growth in Retail Franchise Stores May Fuel Demand

By Sasha M Pardy

February 3, 2010

 

Where will demand for retail real estate come from in 2010? One area increasingly viewed as a potential source is franchise operators. Pricewaterhouse Coopers forecasts that approximately 11,100 new franchised retail stores are expected to open across the country this year.

The International Council of Shopping Centers (ICSC) recently formed a new strategic partnership with the International Franchise Association (IFA) and urged ICSC members to cooperate and form relationships with franchisees and franchisors active in their respective markets.

Explaining why he believed such a partnership is essential to those working in the retail industry, IFA President and CEO Matthew Shay said, "Franchise businesses need retail space and retail centers need occupants, so helping our members connect with real estate experts will help more franchise businesses expand.” ICSC President and CEO Mike Kercheval said the partnership with IFA is not only very timely, but necessary given the increased amount of available space at shopping centers during the recession.

Kercheval said that both franchisees and retail real estate brokers could benefit from sharing their expertise and resources with each other. IFA past chairman, Lawrence Cohen, owner of more than 30 franchise units commented, "Having good information about the real estate industry and developing solid relationships in this sector is a critical component of any franchisee’s success.”

To help foster new relationships between franchisees and retail real estate execs, the two trade associations are planning to hold three educational sessions -- the first will be a real estate strategy session at the IFA's 50th Annual Convention in San Antonio; then the IFA will conduct franchise education sessions at ICSC's Executive Learning Series in New York in April, as well as during ReCon in May. The sessions are expected to encourage landlords and brokers to form relationship with multi-brand and multi-unit franchisees and franchisors, and franchise operators will give the retail real estate community pointers on what particlaur franchisees are looking for in terms of selecting retail locations.

John Bemis, Director of Leasing for Jones Lang LaSalle Retail, said, "While it won't be a spike, I definitely think we will see increased franchise activity this year, with even more growth following in 2011."

Bemis told CoStar that a program JLL launched in the middle of last year to work with certain franchisors in identifying and marketing pre-approved sites has worked well, accounting for at least 10 new store openings in its portfolio of retail space since, with more new units in the pipeline.

Giving an example, Bemis said that JLL works with Nexcen Brands (Maggie Moo's, Marble Slab Creamery, Pretzel Time, Great American Cookie, Athlete's Foot, and Shoebox) to pre-approve sites. For those selected spaces, JLL would put up a window sign on the store indicating the site is pre-approved for the specific franchise concept and providing contact info for the interested party to inquire. "It plants a seed for that person interested in owning a business and opening a store. It’s the power of suggestion," said Bemis, adding that this method also speeds up the store opening timeline for all parties involved.

In addition, JLL has held franchise shows at many of the malls it leases and manages. "Several of the malls held franchise shows where they invited local franchisors to set up in the mall to advertise and solicit business from the local community. To draw people to the shows, the franchisor(s) would advertise to the local community for people interested and they would come. Mall managers report good turnout and positive results," said Bemis.

He added that property owners and brokerage firms can be proactive with franchisors to get their sites considered by franchisors' corporate real estate and franchise development personnel. On a regular basis, JLL holds meetings in which a franchisor would present its various franchise brands and preferred markets / site criteria to JLL leasing agents across the country. Then, leasing agents would identify locations that are a match and present those sites to the franchisor's real estate department.

In any case, Bemis said that it is always in a retail leasing agent's best interest to stay in front of franchisors' corporate real estate personnel. "Franchisors will share their site selection criteria, target markets and other requirements with agents," said Bemis. He added that ICSC's annual convention in Las Vegas and other major regional shows present some of the best opportunities to meet franchisors and learn about their requirements.

While franchisees typically lack the A-quality credit that some national and regional chains can offer, Bemis explained why franchisees should be valued as potential tenants in shopping centers.

"Typically in the franchise world, the operations are owner-operated. They are often times among your best tenants in a shopping center. They are present, it is their livelihood, they are fully invested in the store and their center. That's vital. When you're invested, not only financially, but emotionally, you do everything necessary to make that entity run as great as it can," he said. Additionally, franchisees are typically the tenants that will make more effort to help the center succeed…cooperating with advertising and events, etc. "They have a very vested interest in what goes on. They're keenly aware," added Bemis.

Franchisors JLL is currently working with to find space across the country include Nexcen Brands, Yum! Brands (Pizza Hut, Long John Silver, KFC, A&W, Taco Bell), Cinnabon, Subway, Auntie Anne's, Blimpie, Flamers, Glamour Shots, Nathan's, Rocky Mountain Chocolate Factory, Quiznos, Chick-fil-a, Great Steak, Thirsty’s, Buffalo Wild Wings, and more.

Source: http://www.costar.com/News/Article.aspx?id=1726B177064F196D497179C4BE19131B

What is meant by “Franchising”?

Language-wise

The term “franchising” is a term that dates back to the post-Middle Ages/”Modern Times” and in that context referred to the granting, generally by a king or higher authority, of a right for instance to do commerce in a context in which this right was usually reserved to the higher authority, or to develop/colonise a territory which belonged to the State.

In a similar spirit which had its foundations in the privileged-founded regimes of those times in Europe, it meant the granting of an immunity from an obligation. To be granted a franchise was to be granted a liberty, meaning oftentimes an exemption from a restraint.

Since then and depending on the context, the term “franchise” in English has been used variedly but with very close meaning, although not always with great clarity. One hears of “business franchise” as one hears of “territorial franchise” such as in the film Star Wars.

As franchising has grown internationally, the term “franchise” has been adopted to indicate a business system composed of a brand name, a "system" or format implying the distribution of a product and/or service through a network. This system replicates itself with every new business partner (franchisee) that invests and becomes another member of the network. Interestingly, as cultures, market and social conditions differ, many aspects of business format franchising differ too. The term "franchising" in business evokes: brand name, replication of a system, expansion and network. In fact, it is a lot more complex.

In summary:

In the context of modern commerce, franchising is a business model aimed at the distribution of goods and/or services based on the licensing of a brand, a set of intellectual property rights (the brand names, trademarks or trade names associated with the brand), a business format – bundled and sold as an asset. This business “kit” is sold by the franchisor – the founder of the system – to independent partners who each invest in this offer in order to operate the business opportunity for themselves and in respect of the prescriptions of the format.

The independent partners, the franchisees, together with the franchisor, form the franchise network.

The promotional slogan for such a business partnership is expressed by some as “being in business for yourself but not by yourself”.

“Business-format franchising” is a common term used for this form of commercial distribution.

Franchising has proven itself to be a powerful and efficient means of growing a business and of creating employment and wealth both at local and international level.

This comes from the distinct but combined roles of the franchisor and of the franchisees whose efforts together leverage the potential of the business concept.

In greater detail:

Franchising operates on the basis of a contractual agreement between two independent business parties, the franchisor and the franchisee, in which the franchisor grants the franchisee, for the term of the contract, the right to buy and operate the franchisor’s branded and formatted business system for a fee and according to the prescribed rules and procedures developed for the system by the franchisor.

Hence the term most commonly used to refer to this type of commercial relationship: “business format franchising”.

The franchisor’s “business format franchise” necessarily comprises the following 5 essential* elements:

1. A brand name (registered as a brand name and/or a trademark, etc.) which serves as the umbrella sign for network, and a rallying sign for the consumer and public),

2. a licence to the use the brand, granted to the franchisee by the franchisor,

3. a business system – a business concept formatted into a duplicable value “package” founded on the franchisor’s tested Know How and his continued assistance during the term of the agreement),

4. payment by the franchisee of a financial consideration, either in a direct form, such as an entrance fee and/or continuing fee (“royalty”), and/or an indirect form such as a mark-up on supplied goods,

5. the investment in, and ownership of, the assets of the franchised business by the franchisee

(* source: Martin Mendelsohn, “Franchising Law”, Kluwer, 2004)

A mother company may choose to operate its network entirely as a franchise, or combine franchising with company-owned outlets.

Franchisor and franchisee each have a distinct but complementary role to play in the optimisation of the efficiency and results of the franchise business.

A franchisor seeks to duplicate, as many times as possible, a tested and successful business system with a network of independent partners, the franchisees. As stated above, each franchisee is the owner of his franchised business, and is legally and financially independent of the franchisor and of the other franchisees in the network.

During the term of the franchise contract, the franchisor imparts his know-how and assistance to the franchisees with the purpose of increasing their opportunity for running their franchised business efficiently and profitably.

A franchisee’s principal motive in joining a franchise network is to be in business “for yourself, but not by yourself” and thus improve his chances of success as an independent entrepreneur by having the back-up of a tested system. This increases survivability in the first years of setting up the franchised business, as well as greater chances of rapid expansion since the franchisee concentrates principally on his specific role within the franchise.

The franchisee’s benefits over an isolated independent non-franchised entrepreneur are the following. He

 buys into a brand-name,

 has immediate access to a market via the right to utilise the parent company’s brand name or trademark,

 and benefits from both the transfer of know-how (management, marketing, merchandising) and on-going assistance.

In return for which the franchisee pays the franchisor a fee or royalty, or a combination of fees, which often but not always, includes an entrance fee and/or a fixed percentage of annual turnover for the period of the contract.

Other financial models are possible.

The role of the franchisor is to concentrate on:

 developing and constantly improving the franchise business’s concept so as to ensure the credibility, quality and notoriety of the brand on the market,

 constantly improving the “franchise package” offered to the franchisee which includes:

• seeking and guaranteeing better purchasing prices for goods and services,
• optimising management and sales skills through on-going training,

 organising national or international advertising campaigns,

 steering the business’s overall development strategy.

The role of the franchisee is to concentrate on:

 guaranteeing the customer the best possible service,

 optimising his sales force and results,

 respecting the principles and manner of operating of the franchise business as defined in the franchise contract, which includes respecting the common identity and reputation of the franchise network, and the confidentiality of the business know-how transferred.

Franchising in the life-cycle of a business

To start with, the EFF defends the idea that it is absolutely essential for a franchise system ready to launch itself to have first tested the concept for a period of time allowing for an honest and realistic assessment of its survivability through at least two company-owned pilot outlets on the target market or on a market with a similar economic environment.

A distribution business may set itself up as a franchise from the start, in other words, the business model and its future development is founded entirely on establishing a network made up of the of head company (the franchisor) and a number of independent investors/operators (the franchisees).

Alternatively, the business may from the start combine the "franchise" model with a parallel network of company-owned outlets ("mixed" franchise and company-owned).

Alternatively, a non-franchised business may in the course of its development switch to a franchise business model. Many analysts call this switch "conversion franchising" whereby a non-franchised business converts to the franchise model.

Then again, a business may adopt the various modalities described above at different moments of its development. It may for instance start as a fully franchised concept, gradually evolve into a "mixed" model, and eventually be bought back by the franchisor and turned into a fully company-owned business.

In the course of these developments, the initial concept may change too, and this change factor is an essential factor for the survivability of any business in the fast-evolving world we live in.

For each business, many configurations are possible in the course of time, each motivated by very specific reasons and conditions proper to each system.

Business Format Franchising and other forms of networks of independent entrepreneurs:

The European Franchise Federation upholds the idea that what it qualifies as “franchising” is “Business format franchising” founded on all of the elements described above, and operated in the framework of the principles of ethics defined in the EFF’s Code of Ethics for franchising.

Other forms of business offers exist on the market which may combine certain of the elements of franchising. Some businesses combine all of the above and yet do not call themselves franchises. Others combine only some of the elements above and yet qualify themselves as franchises.

Hence the role of the franchise associations to educate as to what authentic and ethical franchising is.

Offers which may share some aspects of franchising, but which must not be confused with franchising are: 

 agency agreements, 

 selective or exclusive distribution agreements, 

 “business partnerships” taken in a very loose sense 

 co-operatives.

Quote from the Past Chairman of the European Franchise Federation, Pierre Jeanmart, experienced franchisor from Belgium:

“Of the many forms of business relationships between independent business-partners organised in a network, franchising is the most sophisticated both in its business concept construct as in the scope and quality of the franchisor-franchisee relationship without which a franchise system cannot succeed in the long-term. When all of these elements are combined together, we can speak of “authentic and ethical franchising”.

source:www.eff-franchise.com