104 Canadian Franchise Association http://www.cfa.ca | http://www.LookforaFranchise.caLyn Little
National Franchise Co-Leader
BDO Canada LLP
[email protected]
905-633-4942A common dream for the
working majority is to be
their own boss. Often this is
just a wish, but some get to
the point of actively making a move,
and may choose the safety net of
operating their business as part of a
franchise system.
Starting a new business can be cash
intensive, so it is important to know
what to expect when starting out.
Your franchisor can give you a good
idea of these needs, but it’s important
that you also ask the right questions.
Below is a rundown of some of the key
costs that will drive your cash flow
needs through the start-up phase of
operations and beyond.- Initial franchise fees
When buying into a franchise sys-
tem, the franchisor is providing you
with the information you need to run
a successful operation, including the
initial training, operating manual,
use of trademarks/tradenames and
additional items such as secret reci-
pes, products, and ongoing support.
Terms and conditions surrounding
the use of these insights and intellec-
tual property will be outlined in the
franchise agreement. The franchisor
is compensated for providing this pro-
prietary information through various
fees, starting with the initial franchise
fee, which is generally due upon the
signing of the franchise agreement.
Franchise fees generally range
from $10,000-$75,000, but may be
more or less depending on the
industry and franchise group. These
agreements generally last between
five to 10 years, at which time a
renewal fee is payable, at a cost that
can be up to the total initial amount
of the franchise fee. - Start-up costs
Depending on the type of company
you are planning to operate, addi-
tional start-up costs could include
purchasing a vehicle with a logo,
inventory or signage, up to building a
complete store or restaurant including
furniture, fixtures, and equipment.
Legal costs for incorporation,
review of the franchise agreement,
negotiation of a lease, and drafting
employment agreements can add up,
as well. There are also ongoing costs
that may be incurred during a con-
struction period, including utilities,
first and last month’s rent deposits,
training, and insurance.
In some circumstances, start-up
costs can be significant, up to mil-
lions of dollars, so it’s vital to have a
good idea of what to prepare for.- Ongoing fees
On top of initial franchise fees, many
franchisees are charged a number
of other fees to support the ongoing
operations of the system. These often
include royalties, which are nor-
mally between five-to-eight per cent
of sales, and advertising fees, which
are generally one-to-four per cent
of sales. Some brands also charge
fees for local advertising funds or
administration fees if the franchisor
engages in services such as book-
keeping or other ongoing support
costs on behalf of the franchisee. - Period of time before
profitability
During the start-up phase, there may
be weeks or months before the com-
pany begins to turn a profit. Each
franchise system has a different vari-
ation on the ‘normal’ period before
profitability. This timeline, and
the anticipated losses during this
period, can require significant addi-
tional cash flows in order to allow
the company to operate through to
profitability. Discuss this with the
franchisor up front to have a reason-
able expectation of the timeline that
operations will need to be funded
prior to becoming cash flow positive.- Personal working capital
requirements
Franchisees often overlook their
own cash requirements during the
time period before profitability.
Starting a new enterprise requires a
significant amount of time and atten-
tion, which limits the ability to earn
cash outside of the business. It is
important to consider the amount of
cash that will be left out of the busi-
ness and used personally during the
start-up phase until cash can start to
be withdrawn from the company.
When discussing a franchising
opportunity with a potential fran-
chisor, ensure you discuss the dif-
ferent needs for cash upon start-
up. A franchisor should be able to
provide reasonable ranges for all of
the noted costs in order to allow for
adequate planning.
Although entering into the world
of franchising can be daunting and
cash intensive, with proper planning
and solid communication with your
potential franchisor prior to enter-
ing into a franchise agreement, the
needs of the company can be effec-
tively managed to minimize the risk
of running out of cash.I’m thinking about buying a franchise. What do I need to know about the
costs and fees involved?ASK AN ACCOUNTING EXPERT
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