Opening a franchise involves much more than signing a franchise agreement and paying an initial franchise fee. Before committing to a franchise opportunity, franchisees should understand the key items, services, approvals, and financial resources needed to launch and operate the business.
The franchise disclosure document (FDD) is an important starting point. As recently discussed, Item 7 provides the franchisor’s estimate of the investment required to establish and operate the franchise during its early stages. These estimates typically cover the period between signing the franchise agreement and beginning operations.
But wait. There’s more.
These amounts may not reflect the costs in your market. Franchisees have several actual expenses, which can vary substantially depending on location, business size, local regulations, labor costs, and other circumstances.
Real Estate and Build-Out
Depending on the franchise concept, you may need to secure a retail location, office, warehouse, or other facility. Important costs may include:
- Lease payments, security deposits, and utility deposits.
- Construction, renovations, and site improvements.
- Architectural, engineering, and design services.
- Furniture, fixtures, signage, and décor.
- Landlord and franchisor approval fees.
Franchisees must ensure the lease permits the business to operate in compliance with the franchise system and allows for changes to products and services if required by the franchisor. Your franchise agreement may require you to use a location approved by the franchisor or follow detailed specifications for the premises. Review these requirements carefully with a lawyer who has experience in commercial leasing before signing a lease or agreeing to construction expenses.
Equipment, Inventory, and Supplies
Many franchises require specialized equipment, technology, inventory, uniforms, packaging, or other supplies. You may be required to purchase certain items from the franchisor or designated suppliers. These obligations can affect both your start-up budget and ongoing operating costs.
Ask the franchisor for details regarding required equipment and inventory, replacement schedules, warranties, supplier restrictions, and shipping expenses.
Licenses, Permits, and Insurance
Before opening, you may need business licenses, zoning approvals, health permits, professional licenses, inspections, or other governmental approvals. The misconception is that the franchisor is required to tell you what laws apply and what approvals are required. Typically, it is the franchisee who is responsible for determining what laws and licenses apply to the business, and those will vary based on your industry and location.
You will also likely need commercial insurance, such as general liability, property, workers’ compensation, automobile, or professional liability coverage. Confirm the insurance requirements of the franchisor and the landlord and obtain quotes before finalizing your budget.
Employees, Training, and Professional Services
Labor is often one of a new franchise’s largest expenses. Plan for recruiting, payroll, benefits, uniforms, training, and employee turnover. You may also incur travel and lodging costs for required training.
Professional fees may include legal, accounting, tax, real estate, consulting, and payroll services. These expenses can address issues before they become costly problems.
Working Capital and Marketing
You will need sufficient working capital to cover expenses while the business builds a customer base. Consider rent, payroll, utilities, technology, supplies, royalties, advertising contributions, loan payments, and other recurring obligations.
You should also budget for grand opening promotions and ongoing local marketing. Speaking with current and former franchisees can provide practical insight into actual opening costs, launch timelines, and revenue expectations.
Carefully review Item 7 before investing and conduct independent due diligence with an experienced franchise attorney. Proper planning can help you understand what you will need and protect your interests before opening your franchise.
Contact Lusthaus Law
Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends, legislative updates and recent achievements in client representation.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.
