If you are considering the purchase of a franchise it is critical to recognize that your investment goes beyond – well beyond – initial franchise fees and startup expenses. While franchise fees and start-up expenses (such as equipment purchases and build-out) are critical expenses that must be evaluated, they only tell half the story. That is, when signing a franchise agreement you will be committing yourself to a serious of legal obligations that will involve the commitment of your time, future financial resources and legal obligations for many years to come.
So when evaluating the cost of a franchise, in addition to franchise fees and initial start-up costs, give some serious consideration to:
(a) Reserve Capital. Additional funds that you may be required to invest in your business/franchise during periods of unprofitability and negative cash flow. As with any business you may very well encounter periods of unprofitability and losses. When faced with losses and cash flow shortages you will be required to invest additional assets and resources to sustain the operations of your franchise;
(b) Your Time. The extensive time that your will be devoting to operating and managing your new franchise. Your time is valuable and when operating your franchise you will be foregoing income and opportunities from other sources of employment. Although obvious, this expense/opportunity cost is commonly overlooked. If your franchised business does not work out remember that your losses include missed opportunity costs and income that you would have otherwise earned.
(c) Post-Termination Restrictive Covenants and Fees. As a franchisee in most instances you will be committing yourself to long-term obligations and restrictive covenants. These covenants and obligations have a cost, especially when they restrict what you can and cannot do if you elect to shut down your franchise. This is of special concern to current business owners with established reputations within a community who – for legitimate reasons – decide to become a franchisee of a national company.
For Example – If you are a carpenter with a long established reputation within a community and you elect to purchase and become a franchisee of a national repair or handyman franchise what happens if your franchise relationship does not work out and you cancel your franchise agreement? Will you be precluded from operating your own repair business – a business that you operated many years before becoming a franchisee? The answer is that it all depends on the restrictive covenants contained in your franchise agreement – covenants and obligations that you should review and discuss in detail with your franchise lawyer before signing a franchise agreement.
So when considering the cost of your franchise investment you must go beyond out of pocket expenses and fees and evaluate the substantive impact of the long-term legal obligations that you will be committing to.