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Are You Aware of All the Costs of a Franchise?

By: Bill Bradley


Deciding which franchise business opportunities you should invest in requires a lot of research and serious thought. One of the most important areas of the research and decision making process is the financial arena. While franchisors will tell you how much you need to invest, and usually also the net worth you should have before considering their franchise, you will need to do your own evaluation of the expenses and income you can expect from a franchise.

Certainly, you’ll ask current franchisees about their expenses and income. But there are costs that may not come up for every franchisee, and which may not come to mind for the people you talk with. Here are a few examples:
Overtime pay for workers is not something most franchisees plan for. Typically, you’ll want to keep your costs down. You’ll be given a typical scenario by the franchisor as well as specific experiences from current franchisees and you’ll have some expectations for the number of workers you’ll need. You probably won’t plan to keep workers on the clock more than 40 hours a week.In fact, you may expect to have part time workers rather than full time in most positions.
Related Article: The Real Cost of Overtime
But things happen. Workers may leave suddenly—especially part time workers, who may have other priorities, such as school, or who may be working part time only until they find a full time job somewhere else. It may be hard to replace workers who leave suddenly, or even workers who are out sick. You may also have the pleasant problem of fast growth and need more work done while you find a train additional people you hadn’t planned for. Asking someone else on the staff to pitch in till things get back to normal seems like a reasonable step in all these cases.
But in many states, if that pitching in keeps your worker on the clock for more than 40 hours, he or she is entitled to time and a half. Fail to pay the extra wages, and you can be held guilty of wage theft. One California chain recently had to come up with years of back pay for workers who had done overtime without receiving time and a half—plus penalties.
Be sure to check the laws in your area, and plan to have funds on hand to cover the extra costs if an emergency need arises.
Some franchises require that a certain percentage of revenue be spent on marketing, or that a certain percentage be put into group marketing efforts. You’ll budget for those costs.
Other franchises leave it up to franchisees. Small business owners often think of marketing as an optional expense, or something they’ll do once they get more established. And franchisees may expect that their franchise’s well-known name will do most of the work of marketing. The number of franchisees who complain about the marketing fees requirement can tell you that they wouldn’t be putting serious funds into marketing if they weren’t required to do so.
But marketing is a normal business expense. The Small Business Administration recommends putting 7 to 8% of your gross revenue into marketing. Are you planning for that?
There’s nothing as sure as death and taxes—but it’s surprising how many businesses are taken by surprise when they see their tax bills. If you collect sales taxes, you must file and pay them as well. You collect the taxes and pass them along, so theoretically there is no cost to you, but you will have to cover the costs of software or bookkeeping time to stay in compliance.
Have your accountant look at the figures you come up with for the operating expenses of the franchise you’re considering and give you a prediction about how much you should add on for taxes.
Considering easily overlooked costs like these can help you gain a more realistic idea of the profits you can expect for the franchise you’re thinking of.
This article was originally published by America’s Best Franchises
Published: February 16, 2015

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Bill Bradley

Bill Bradley

Bill Bradley is founding member and CEO of America’s Best Franchises, LLC.  Bill founded three financial services firms, Ocean Shores Ventures, Denali International and William Bradley Enterprises. In addition, to launching America’s Best Franchises in 2005, Bill orchestrated approximately 20 private equity transactions in excess of $31 million, and launched five specific purpose private equity partnerships.

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