5 Tips to Dodge Hidden Franchise Costs That Can Sink You!
What’s up, everyone! Giuseppe Grammatico, your franchise guide, here. I am so excited to be celebrating the 5th year anniversary of the Franchise Freedom Podcast with you! It is episode 228 and I am beyond honored to be able to assist those who want to have financial freedom through the power of information. The show is here for you and the main goal is just to assist one person and that makes our day. We have some great advice to provide today.
In the last episode, we talked about general rookie mistakes to avoid in your franchise journey. Today, we’re diving deep into the financial side – the hidden costs that can truly sink your franchise if you’re not prepared. A lot of the information on this will relate and piggyback off one another, but don’t worry I am here to give you more information so you can see how these pieces relate.
I had a conversation the other day about this, and I knew I had to share these insights with you all. These aren’t always obvious, so awareness is key! I wanted to reiterate to everyone who is new, that we want to provide tips to help answer your questions, this is what this podcast is here for. Make sure to write a review and connect so we know your areas of concern!
If you’re exploring franchise ownership, reach out! My team and I offer a free service to help you determine if franchising is the right fit for you. It’s similar to working with an executive recruiter – and the best part is that there is no cost to you!
Ready? Let’s jump into those five tips!
1. Know Your FDD Inside and Out: Your Financial Compass
The Franchise Disclosure Document (FDD) is your bible when it comes to understanding costs. Many people believe that reading the FDD is the end all be all but understanding if the brand is even the right fit or have availability is key to make sure there is no wasted time. Within the 23 items listed and the hundreds of pages that follow, pay close attention to:
- Item 5: Initial Fees: This outlines the franchise fee and other upfront costs.
- Item 6: Other Fees: Royalties, marketing fees, technology fees – it’s all here.
- Item 7: Estimated Initial Investment: This is a range of costs to get started, but make sure you understand everything it includes.
Do this before looking at those fancy brands everyone always raves about, understanding all the areas to help assist you will save you time and money! Now, let’s dive more into why the FDD matters. Creating a pro forma to see what your costs will equate to can be difficult. The Item 5 & 6 provide various costs and fees a franchisee can expect to encounter. It will never be exact but it will lay out those expenses in a way that provides understanding. There will need to be some planning from your side in this as well! It is common that running a business on a full time scale looks a lot different than a part time or semi-passive. These expenses must be accounted for. In the Item 7 you could expect to budget for 3 months salary. As they say the proof is in the pudding! Talk to other existing owners to see how they account for all of these things!
2. Talk to Fellow Franchisees: The Real Deal
The FDD is just the start. Speak with franchisees – multiple franchisees. Don’t just talk to the ones the franchisor recommends. Seek out a few on your own as well! I am all about hearing both sides, it does not matter whether it’s one location away or one time zone, it can only provide knowledge and will always reduce some stress knowing you did some great planning!
- New vs. Existing: What costs did they not anticipate?
- Full-Time vs. Part-Time: How does that role impact expenses?
- In Your Market: What are the local market nuances?
What to ask:
- What could be the reason for the expense?
- Can I expect these expenses or can I minimize these over time?
- How did you come to know of these costs?
These questions will always give you a new set of guidelines to plan from, the experience can only benefit your new journey in business ownership and allow for a new level of understanding!
3. Your Role: Full-Time or Part-Time?
Are you going to run this business full-time, or keep your day job and hire a general manager? This decision drastically impacts costs. In the first tip, we discussed the pro forma, it must also factor debt and other expenses you may have. Always prepare for those expenses! Your personal life does not take a pause just because you have a new venture! There should always be a buffer because things happen and it may affect you down the line. Ask if this job or the location or hours will take up a big chunk of time. This time that can be allotted for other parts of the business.
- Full-Time: Less payroll, but you’re replacing your existing income
- Part-Time: General manager salary, but you keep your current paycheck
Also, is this permitted? Always ask the franchisor if semi-passive ownership is allowed! Not all franchises allow that!
4. Factor in Higher Costs: Pad Your Budget!
Always, always, anticipate that costs will be higher than expected. This is something I’ve had to learn myself. Add a “buffer” to your budget for those unexpected expenses.
- Raw Materials: Prices can fluctuate (especially with economic conditions!)
- Interest Rates: Variable-rate loans can change. In your financial plan to reduce a surprise, contact the finance lender for potential answers.
Travel and Training: Sending a key employee for training? Factor in those costs (flights, hotels, etc.) to reduce turnover!
5. There’s No Crystal Ball: Expect the Unexpected
You can research, plan, and budget, but you can’t predict the future. A war could break out. Interest rates can skyrocket. The economy can tank. Having reserves and knowing your break-even point is crucial.
If you are looking at a franchise resale, make sure you are clear on all the financials. For example, if the owner is netting $200K, will you net the same amount or will you have a note to pay every month, reducing the amount you will be able to take out of the business.
It is time to stop with what is known as “shiny object syndrome!” Stay focused on the franchise model and the key characteristics of the business as we are looking for a franchise that will take advantage of your transferable skills. We want the business to be sustainable for the long run so that you can plan an exit strategy.
Make sure to work closely with your coach as they will be able to guide you through the entire process keeping you on track.
The Takeaway
Insufficient preparation for hidden costs can hurt your franchise. To avoid this, do your research, consult existing franchisees, create a budget, and prepare for unforeseen expenses. Remember that getting expert guidance in these areas can be crucial in setting up your business for success.
I hope this episode has been helpful and as always we are here to help with any part of the process. Make sure to check out our prior shows!
What are your thoughts? How prepared do you truly feel?
Ready to take the next step? Find the franchise that is a right fit for you at https://ggthefranchiseguide.com/right-fit