Franchisee Financial Investment: New & Acquired Franchises

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The financial investment that is involved with either starting a new franchise or acquiring an existing franchise, and financing its ongoing operations, is not insignificant, and most often more significant than what most franchisees anticipate. The real cost associated with one's franchise tends to exceed general projections, especially those that are generic and based on past experience, which all too often is grossly out-dated and fail to reflect current financial demands and ever increasing costs.

Launching a new franchise or acquiring an operating franchise typically involves a number of significant financial costs, which can vary widely based on the brand, industry, and location.The total investment is generally broken down into initial upfront costs to get the business started and ongoing fees to maintain the franchise relationship.

A. Initial Upfront Costs

These are the expenses incurred before and immediately after the franchise launch/acquisition:

• Franchise Fee / Purchase Price: This is a one-time, lump-sum payment to the franchisor for the license to use the brand's name, trademarks, logos, and proven business model.It also often covers the cost to the franchisor of initial training, site selection assistance, and grand opening support. Where one acquires an operating franchise, there can be a very significant purchase price that needs to be paid to the outgoing franchise owner, together with a reduced franchise fee, as there are costs sought by the franchisor, although this isn't an entirely new launch.

• Real Estate and Leasehold Improvements (Build-Out): For a brick-and-mortar location, this includes rent/mortgage payments, as well as the cost to renovate or build the physical space to meet the franchisor's specifications and design standards. When acquiring an operating franchise, these costs would tend to relate to updating and renovating, which might be mandated by the franchisor [more on build-outs].

• Equipment, Furniture, and Fixtures: The cost of all necessary items like cooking equipment, point-of-sale (POS) systems, seating, shelving, computers, and signage. For an operating franchise, these costs typically form part of the purchase price.

• Initial Inventory and Supplies: The first stock of products, materials, and operational supplies needed to open the doors. For an operating franchise, these costs tend to form part of the purchase price.

• Working Capital (Additional Funds): This is one of the most crucial and often underestimated costs. It is the reserve cash needed to cover initial operating expenses (payroll, utilities, rent, and advertising) until the business becomes profitable. It is also appicable for purchasers of an operating franchise [more on importance of working capital].

• Grand Opening Advertising: A dedicated budget for promotions and marketing activities to drive initial awareness and traffic for the launch. For ongoing franchises, it is not typical to have a major re-launch, although an improvement in advertising and marketing budgets tends to be a smart move.

• Professional Fees: Costs for legal review of the franchise documentation and related legal work, and consultation with an accountant or financial advisor who specializes in franchising. These professional fees tend to be more significant when purchasing an operating franchise, given the importance of protecting the purchaser in the franchise acquisition.

• Licenses, Permits, and Insurance: Required fees for business licenses, health permits, and various insurance policies (liability, property, etc.). When acquiring an operating franchise, these fees tend to be associated with the transferrences.

B. Ongoing Fees and Operational Costs

These are the recurring expenses essential for the continued operation of the franchise:

• Royalty Payments (Royalties): Regular payments made to the franchisor, usually a percentage of your gross sales (e.g., 4% to 10%). This is for the ongoing right to operate under the brand and receive support. Advertising/Marketing Fees:A required contribution to a national or regional advertising fund to promote the brand as a whole. This is also typically a percentage of gross sales.

• Technology/Software Fees: Recurring fees for proprietary software, internal communications systems, and required technology upgrades.

• Supply Chain/Mandated Purchases: Costs associated with buying required products or ingredients exclusively from the franchisor or approved vendors, which may sometimes be more expensive than open-market alternatives. Meanwhile, normal business purchases necessitated by the franchise's operations.

• Employees: The ongoing staffing and managment costs of an operating franchise, especially one that is labour-intensive, tend not to be insubstantial.

• Real Estate Property Costs: Whether you are leasing (lease payments) or purchasing the real estate (mortgage payments), there are considerable ongoing and situational costs that arise from the real property from which the franchise is operated.

• Financing Charges: Whether financing was required to acquire the franchise, the real estate from which it operates and/or an operating line of credit, the associated financing charges are but another financial consideration for budgetary planning.

• Taxes: There tends to be a broad array of taxes that arise through the operation of a franchise that franchisee's need to be appropriately budgeting for, together with other charges that are due to governmental and quasi-governmental bodies.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.