Tony's Tip of the Month! - SEPT '11

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-PART 1-

Frequently, in this business, I hear that the cost to start your own business is unreasonable and unaffordable. For the majority of us this is true. Let’s take a look at some of cost that is predominant in this venture.

Know Your Total Start Up Cost!

Never be fooled by advertisements that tell you that the franchise fee is really low. It isn’t just the startup costs that you incur. There are a variety of other costs that you incur as you operate the business. A common cause of franchise failures is the lack of working capital.

Franchise costs vary according to the industry in which you’re operating the franchise. Therefore, the cheapest cost franchise won’t necessarily mean that it’s the most profitable venture.

Therefore, let’s look at the costs of buying a franchise business.

Franchise fee

This is the fee you pay up front to the franchisor when you put pen to paper. It generally is not refundable ($5000-$100000 or maybe even more). The services you will get with this fee will include use of brand name, business concept, marketing tools, employee training and initial support. Therefore, when choosing franchisors, pay attention to what services they will provide you.

Initial investment

Most franchisors would require you to put in somewhere around 30% - 35% of the investment from your own pocket.

Working Capital

Though it is not paid enough attention to, you need to have enough working capital so that you can take care of business expenses without depending absolutely on your revenue. The requirement generally depends on the line of business, and may vary from 2 – 3 months capital to 2 – 3 years working capital!

Loan Application Fees - Real Estate Cost

Regardless of the method by which you get premises to start operations, there will obviously be real estate costs that you will incur. These costs generally include expenses such as security, rent deposits and zoning expenses.

Professional Fees - Business Insurance

Get an estimate from your franchisor & your insurance broker as to the value of the amount you have to insure your business for. The insurance may include workers’ compensation, goods damage and halt of business activities.

Permits and Licenses

You’ll need to get a number of permits before you start business depending on the line of business. Required permits may include fire department or sign permits. Your franchisor will tell you the permits you’ll need, but don’t stop with that because he may not know the permits required in your area. Check with the state office to find out what you’ll need.


The training will be provided as part of the franchise fee you give, but you’ll generally have to pay the airfare and for hotel accommodations.

Pre – opening labor and salaries - Inventory & Equipment

The franchisor may require you to purchase supplies either from themselves or from certain suppliers. However, be on the watch out if your franchisor charges more than the market price. Check with a number of franchises to see whether they charge fair prices and deliver the supplies on time.

Décor and Fixtures - Recurring costs

Royalty fees – A payment that you’ll make to the franchisor annually, somewhere around 5 – 10 percent of your annual turnover.

  • Interest cost on loans taken
  • Insurance premiums
  • Employee benefits
  • Taxes
  • Office equipment
  • Marketing and promotion costs
  • Training

Get some words of wisdom from an accountant, who will collect your plans in an organized manner and show you the projected revenue. He may be able to prepare forecast cash – flow statement so that you’ll get an idea of how much you need to start up your business and keep it running. The money you spend on all this will be worthwhile.

It’s also of utmost importance that you get a properly qualified attorney to look over the franchise agreement to see whether everything’s in order. This contract contains a lot of important details, and therefore, you need to make sure that you know the rights and obligations that you have before you affix your signature.

So far, that alone is overwhelming, but let’s assume you really want to move forward. Next month we’ll look at some issues about a very common franchise that you may want to see. Can you guess who??



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