By Paul Giggi
Question 1 of 5 in the Blog Series: Top 5 Questions To Ask a Franchisor
If you haven’t had a chance to see our Video on this topic I would like to suggest you do so. For this blog we will focus on Question #1 of our Key 5 questions to ask the Franchisor.
At your first introduction to a Franchisor, there are many questions to consider asking. Some are more important than others in the initial phase as you try to determine if a particular concept and Franchisor is the right one for you to partner with in operating the business.
The first of our 5 Key Questions to Ask:
What is the Total Investment Cost?
You’ll probably come to the table knowing your total available investment capabilities. But to ascertain if you can afford the cost and risk of the venture, you need to understand the Total Investment Cost of the Franchise. Asking the question about Total Investment Cost has many parts to it, so be sure to ask for specifics and fully understand the reply.
Franchisors are governed by the Federal Trade Commission and, therefore are restricted in the detail of the information they can share as they are not allowed to make an earnings claim to prospective Franchisees. This is to protect them (and you) as you move forward in your due diligence. Without this protection the Franchisor could fall prey to lawsuit liability; if they tell a prospect what they will see as a return and that return is later not realized. It protects you from unscrupulous Franchisors that otherwise might offer false financial promises and information so to entice you to become a Franchisee.
Franchisors are normally going to share with you a range of costs for the complete operations build-out and opening of a single unit. Within this range are numerous items to be sure to understand and discuss. Many of these costs are disclosed in the Franchise Disclosure Document that you will receive as your next step in the qualification and discovery process.
The range offered could be small or large depending on what type of construction (i.e. free standing, end cap, in line, etc.…), the purchase approach (build to suit, your own build, lease, etc.…), and other important components. When this range is offered to you, if some of these items are not offered immediately, be sure to ask what category the range covers and then discuss the inclusions and exclusions of this range so you have a firm understanding of what additional costs you may have to incur.
Typically, the range will cover your construction costs, FF&E (Furniture, Fixtures and Equipment), permit costs, opening inventory, signage, POS (Point of Sale) systems, opening training costs, opening marketing costs and may even include a certain amount of working capital. There will be more items included and be sure to ask what items are in the range. Also, and as important, be sure to understand what is not in the range. Often items such as your Real Estate costs and liquor licensing (if applicable) will not be included. Once you have the “all in” figure you are prepared to review the Franchise Disclosure Document (FDD) with a better understanding of the cost areas to target and get a clear understanding.
This question is an important one to fully understand and you may want to consult with those who are current franchisees of a concept or with people who have experience in this area so to be sure you leave no stone unturned in your informational search.
Please check out our Video and watch for future blogs on the other important questions to ask of your Franchisor.