Opening a franchise may seem less risky than starting another type of business, but like all new businesses, it can require a significant upfront investment. Running out of money is a big reason why businesses fail. If you are thinking about buying a franchise, you must understand how much working capital you will need. Fortunately, the franchise disclosure document (FDD) gives you a starting point to determine what it will cost to open your franchise.
As discussed in a previous post, the FDD provides information on the Initial Franchise Fees and Recurring Fees you must pay. Item 7 of the FDD goes beyond these expenses and outlines in a chart your “estimated initial investment.” These start-up costs reflect amounts franchisees will likely have to pay to third parties for a reasonable initial period, encompassing the time between signing the agreement through the beginning stages of operations. Some common expenses include rent, inventory, equipment, supplies, furnishings, advertising, software, permits, insurance, professional fees, utility costs and other payments.
While this is a good beginning, you will want to review Item 7 carefully to ensure you clearly understand what types of expenses you will incur in launching your franchise. In addition, you should conduct your own due diligence on potential costs. The FDD gives estimates only and the figures are not tailored to local markets. It is up to you to investigate the costs in your area, which may vary significantly from the amounts listed in Item 7. As part of the due diligence process, you should also consider speaking to other franchisees to gain insights on opening and operating a franchise and working with the franchisor. Issues like finding a location, hiring vendors, training employees, working with contractors and architects, buying equipment and software, dealing with permits, getting franchisor approvals and myriad other matters are part of launching and maintaining a new business. It is important for you to understand not only the cost of these items but also how long it may take to launch the business and bring in sufficient revenue to keep the business going. Existing franchisees can provide a wealth of useful information to help you beyond Item 7.
If you are considering buying a franchise, speak to an experienced franchise attorney who can guide you through the process of buying and opening a franchise. Contact Lusthaus Law to learn how we can help protect your interests.
