Food Franchise

Posts Tagged ‘Franchise Fee’

What Exactly is the Difference Between a Traditional Franchise and a Turnkey Business?

A traditional franchise is a business in which authorization has been given to an entrepreneur to sell and/or distribute an established company’s goods or services in a particular area. The term “franchise” is also used to refer to a business or group of businesses that operate under such conditions.

With a traditional franchise, the franchisee—that’s the individual business owner—pays the franchisor—the corporation—a franchise fee for the right to use the franchisor’s name and business model. Start-up materials and ongoing support are often provided by the franchisor, but there are still many aspects of operating the business that are the responsibility of the franchisee.

A turnkey business, however, is one in which everything an entrepreneur requires to open a franchised unit is provided. The term “turnkey” comes from the idea that—using one of these packages—all one would have to do to open for business is “turn the key.”

Recently, the realm of Internet business has seen a boom in the number of turnkey websites. This is the same thing as a brick-and-mortar turnkey business with the exception that the business owner is being provided with a fully functional website versus a fully stocked store, for example.

Is Everything Really Included in a Turnkey Package?

In the truest sense of the word, yes. The franchisor would provide and do everything, including selecting and leasing your location and hiring your staff. In reality, however, you won’t find very many franchisors who will actually hire your employees.

But the franchisor offering a turnkey package will take care of most of what needs to be done in order to open your business. This can be a great advantage if you are new to franchising because it will save you hours upon hours of work and research.

Turnkey packages can also be an exercise in swindling, however, and you should do some research to find out what you’re getting into.

So, How Do I Choose the Right Turnkey Package?

The best way to research this is by asking existing franchisees. The main thing you’ll want to inquire about is whether the existing franchisees feel they got a good deal with the turnkey package. In other words, the franchisor shouldn’t be putting a high markup on the package components. Their income should be coming from royalty and franchise fees—not start-up costs for new franchisees.

If you don’t feel you can acquire adequate information from business owners who are already involved in your selected franchise, ask the franchisor if they are willing to provide you with a complete cost breakdown. You’ll also want to ask whether the labor involved in providing the package is a separate line item or factored into the cost of each component. If it is factored in, what is the markup percentage?

Take comfort, however, in the fact that the information you really want—whether or not you’re being ripped off—is fairly easy to come by. If a franchisor’s turnkey package has an exorbitant markup, the existing franchisees are going to be aware that they were had. And they will probably be more than willing to tell you about it.

What Are the Advantages of a Turnkey Business?

Because of the all-inclusive nature of the turnkey package, it is a fantastic opportunity for those budding entrepreneurs who may not have the knowledge base of a veteran franchisee. And, even if you are very business savvy, a turnkey package saves you the time and effort involved in starting a company from the ground up, i.e.: developing a successful business plan, choosing and leasing a location, purchasing inventory, hiring employees, etc.

Although the initial investment for a turnkey business may be a little more than a traditional franchise, the rewards for that investment are substantial. You’re buying into a brand—perhaps one with which consumers are already familiar. There are certain restaurant chains, for example, that you know are not going to go under. People will always want burgers and ice cream. This substantially lowers the risk to you, the franchisee, by allowing you to utilize a proven business model.

A turnkey business will also save on the time it takes to open your doors over a traditional franchise because most of the start-up issues will be addressed for you.

Final Thoughts

As with any business venture, a turnkey business opportunity does represent a certain amount of risk—even if that risk is smaller than other types of businesses, so do your research. Ask the questions that were discussed in this article. Find out if the other franchisees in the company are happy with the way things have turned out for them. Once you’re confident that you’ve selected a franchise that will be a good match to your own business style and lifestyle, all you have to do is turn the key.

Finding The Right Franchise

Whether it’s hamburgers, pizza, telecom, coffee, Internet, muffler parts, or seniors’ services, there are Franchise opportunities available to evaluate. There are great Franchise systems, good Franchise systems, and bad Franchise systems. The challenge is to ask the right questions to find the right system that will fit your goals and dreams. The key is to ask the questions – and listen closely to the responses. Only then can you determine if the Franchise opportunity is the right fit for you. So whether it’s food services like burgers or coffee, professional services like telecom or IT, or manual services like cleaning or oil changes, ask the questions and record the answers.

Why Do I Pay A Franchise Fee?

Franchising is a strategy that the Franchisor uses to achieve its objectives, including market penetration and market domination. Franchises are granted or awarded to a qualifying Franchise Candidate that has similar objectives in their own marketplace. That Franchisee will have the responsibility to fully implement the operating and marketing systems of the Franchisor in their defined area for a specified period of time. The relationship is not generally one of parity.

If it were a relationship of parity, the Franchisee would take on a great deal more responsibility, and of course, liability and risk as well. So the relationship is not one of actual partnership in the legal sense. However, good Franchise systems will generally recognize their Franchisees as Strategic-Partners, meaning they are in a partnership of sorts that is aimed at achieving unified goals, but not one of legal partnership or equity.

The Franchise Fee is the cost of putting the Franchisee into the business of the Franchisor, not as a partner, but as a participant. Costs include:

1) The development costs of all of the elements of the Franchisor’s system
2) Training the Franchisee to use those system elements and programs
3) Marketing and advertising to find Candidates
4) Costs of qualifying Candidates including rejecting many unqualified Candidates
5) Salaries, travel, & administration
6) Legal expenses to draft agreements defining the methods & terms for the Franchisee to participate, etc.

It is the Franchisor’s assessment to cover those costs as well as a reasonable markup. In other words, it’s the entry fee to the point of the completion of the initial training programs.

To the Franchisee it must represent a reasonable fee to allow you to become a part of the existing system, including all of the training programs that are a part of that system, to help you reach your own business goals.

When asked about the Franchise Fee, the Franchisor should have this concept clearly defined in their approach to Franchising. They should recognize that the Franchise Fee should be reflective of the value of entry into a well-developed, comprehensive system for the participant Franchisee. They should also recognize it as the recovery of costs to find, qualify, and grant legal rights to participate in that system to the very best Franchisees for the Franchisor’s business.

Dennis Schooley is the Founder of Schooley Mitchell Telecom Consultants, a Professional Services Franchise Company. He writes for publication, as well as for schooleymitchell.blogging.com and franchises.blogging.com, in the subject areas of Franchising, and Technology for the Layman. www.schooleymitchell.com, 888-311-6477, dschooley@schooleymitchell.com.

What is the Franchise Agreement?

The franchise agreement outlines the way your business will work within your franchise system. It gives both you, the franchisee, and your franchisor a clear understanding of the terms of your business relationship.

The franchise agreement also serves to ensure uniformity, which is beneficial not only to the franchisor but to the franchisee as well. If, for example, a customer has an unsatisfactory experience at another unit within your franchise, he will be unlikely to want to do business with your unit. Therefore, the franchisee is under obligation to maintain uniformity, and the franchise agreement will establish parameters for that uniformity.

These parameters include what products you’ll use or sell at your franchise and the quality of services that must be provided by your employees.

The franchise agreement also details what actions will be taken should you breach these parameters. It explains, for example, what notices the company must give you and how much time you have to respond once notice is given.

What Should be Included in a Franchise Agreement?

First and foremost the franchise agreement should state that you are part of the franchise and that you have a fixed fee (your franchise fee) to pay in compensation for this privilege.

The franchisor has the right to approve or disapprove of sites for your location, but at the same time they will be obligated to assist you in the selection of a site for your business.

There will be a section in the agreement that goes over the use of the franchise name. Specifically, you may not challenge the franchisor’s right to use the name and will be required to inform the franchisor if you discover someone else using the name without permission.

The franchise agreement also indicates how you will be expected to maintain the aforementioned uniformity.

Other Provisions You May See

The agreement will state the manner in which you must display signage at your locations. There may be certain requirements and/or restrictions on the use of a sign with the franchise name.

Often a section is included detailing what training and assistance will be provided by the franchisor. This section would go over the franchisor’s responsibility to help a new franchisee get his unit going.

A franchise agreement may contain a section on advertising. Some companies use a national advertising fund to which you will have to contribute but will also benefit from during a national ad campaign. Additionally, many franchisors want to retain the right to review any and all advertising/promotional materials you may use to ensure—you guessed it—uniformity.

A section about the operating manual will require that you abide by it and adopt any revisions made to it by the franchisor. You will be under a confidentiality agreement concerning the operating manual—which remains the property of the franchisor—because the manual will divulge everything about the franchise’s business plan.

It’s in the best interest of the franchisor that his franchisees operate out of clean, well-maintained buildings, so there may be a section of the franchise agreement pertaining to maintenance and repairs.

The franchise agreement will have requirements concerning records and accounting. You will be required to keep certain records and to provide your franchisor with annual statements which have been audited by a certified public accountant (CPA).

Standards and quality sections—which can be very lengthy in some cases—will, again, provide for uniformity across the franchise system.

If the business opportunity you’re availing yourself of requires a lot of labor or products that are produced at your location (this includes food), a franchisor will insist on quality assurance provisions. This, too, will be a lengthy section of the franchise agreement.

A section on modifications will basically state that the franchisor has the right to make system changes at anytime and require you to adopt them, but you, the franchisee, may not make any changes without approval.

The franchise agreement will specify what royalties the franchisee must pay for continuing to use the franchise’s name and business plan.

The franchisor will have some amount of insurance it requires franchisees to carry, and this will be outlined in the franchise agreement.

Of course, there will be a section of the franchise agreement that states how long your franchise will last. In many cases, this term coincides with a lease, so if, for example, you have a ten-year lease on your building, you will have a ten-year franchise agreement. The agreements may or may not be renewed at the end of the agreement period at either party’s discretion.

Something called a “covenant” section will state that you cannot use the knowledge and training provided to you by the franchisor to open an identical business that simply has a different name.

A section of your franchise agreement will detail what will happen at the end of the agreement including what rights each party has at that time. This section will also deal with actions that will cause you to be in default of your franchise agreement and, therefore, subject to termination by the franchisor.

The franchise agreement will state that you are required to obtain all permits, licenses, etc. necessary to conduct business in your area and that you must be in compliance with all local, state and federal laws. This section will also state that debts you incur in the course of doing business are your responsibility and not the responsibility of the franchisor.

A “nonwaiver provision” will explain that all provisions of the franchise agreement are enforceable at any time. Although a franchisor might not enforce a certain provision at a given time, they still reserve the right to enforce that provision at a later time. The same rule will apply to fees owed by the franchisee. If the franchisor does not accept payment from you for any reason, they will still have the right to collect on that debt at a later time.

Sometimes an arbitration clause will be included, although these clauses are disallowed in some states. If your franchise agreement does have an arbitration clause, it may require you to submit to binding arbitration in the event of a dispute.

Finally, the franchise agreement will designate you and your successors as the franchisee for that agreement and state that you are aware of the assumption of risk. The success of your business will not be guaranteed by the franchisor.

Pizza Hut is one of the most famous fast food franchises in the world and this success is reflected in the cost and content of its franchise opportunity. Like Long John Silver’s and KFC, Pizza Hut is one of the franchise chains that has been taken over by Yums and therefore franchisees are able to take advantage of the benefits that attached to a large multi-national corporation.

As the name suggest Pizza Hut specialises in the sale of pizza, either for consumption in their restaurants or as a take away or home delivery. The company states that it is part of the largest restaurant chain in the world and that Pizza Hut itself has a global presence of in excess of 20,000 franchisees.

As part of the Yum group of franchise chains, the costs and financial expectations required of a potential Pizza Hut franchisee is similar to the other in the group, including those mentioned above. In this respect, to include the cost of the design, renovation and purchase of the outlet premises, there is a requirement for a total investment of up to $1 million depending upon the size and location of the outlet.

The franchisee is expected to have a net worth of around $1.4 million, of which around $360,000 is expected to be liquid. They will be required to pay a franchise fee of around $25,000, although this figure is also flexible and will rise with larger units. Royalty fees are 5% and in addition to this each franchisee is required to contribute towards the corporation’s $600 million annual promotional and advertising campaign.

Full training is provided for franchisees and their employees and there is the opportunity to learn leadership and business skills at Yum’s own university, which has standards similar to those of a main line university.

The Pizza Hut has its own unique brand and this is coordinated throughout the store design, stationery and promotional material. Menus and promotional offers are controlled by the central corporation, so the amount of flexibility available to the franchisee in terms of the products they offer is limited.

A full and comprehensive help and support service is available to franchisees at all times following their franchise purchase and they can also expect to receive regular visit from the regional teams, which are designed to maintain quality and control, in addition to ensuring that the franchisee is making the correct returns from which royalty fees are calculated.

If you ever saw yourself as a Pizza outlet owner, Pizza Hut, with the backing of a multi-national organisation, is one of the better franchises in this sector.

Franchising for the over 50’s. Which franchise is right for you? Financial situations play a major role in choosing which franchise opportunity to undertake. The best cost-return for your money, on a franchise business, is in the pizza industry. Boston Pizza, Pizza Hut, Pizza Pizza, or 2 for 1 Pizza, it all depends upon how much money you have available, in cash and loans, to invest in a franchise business opportunity. And availability, locations, permits and demographics all play a role in selecting the right franchise opportunity for you. There are start-up costs for any franchise, be it a Tim Horton’s Donut store, a McDonald’s or a Burger King. Staff needs to be hired and trained. Product needs to be in place, and a direct and constant, dependable supply chain arranged. If you are looking for something to consume almost all of your waking hours, then the franchise industry is tailor-made for you. Everything can be included, from uniforms to kitchen equipment, from the foodstuffs and drinks to napkins and condiments, cash registers and even furniture sometimes are supplied. Whether you will be selling Pepsi or Coke will most likely be a pre-determined factor, not under your control, as these things are decided at the corporate level. Advertisements and corporate deals are made, promises and promotions. But the profit is there, just waiting for you to gobble it all up. All you need is the deposit, the franchise fee, land at a prime location, all city permits, licenses and by-laws paid and met, the blessings and approvals of the franchise’s parent company, and the desire.

Not happy with the idea of retirement, and want to make your money work for you? If you have saved up for the opportunity of going into business for yourself, and are financially prepared, then buying into franchising is a prudent and feasible investment decision. Determining the proper franchise for your intended market is one factor that could make or break your business venture. Placing an expensive franchise in the wrong geographic location will ultimately do you in, as you have to meet sales levels to maintain your franchisee status. Refunds are almost never involved when losing your franchise standing. That would be a lot of lost money. Picking a growing young community, near major highway access and big business, with schools and housing within walking distance can be a very tricky undertaking. Buying a pre-existing franchise, from a deceased owner’s estate,