By Peter Snell
This column has been exploring the content of the franchise disclosure document in Canada. Recent topics included what exactly a disclosure document is, what you need to know about the franchisor and whether you can find out how much money you will make as a franchisee. This column will focus on another important topic—the costs of becoming a franchisee.
In their disclosure document, franchisors provide information about various fees and expenses payable under the franchise agreement. This is valuable information you need to review carefully.
As always, while the following information serves as a general overview, you should also seek your own legal and accounting advice when reviewing a disclosure document. Only then can you obtain the specific information and advice relevant to your particular circumstances.
How much will it cost to be a franchisee?
As addressed previously, while every franchisee wants to know how much money he or she will make, franchisors are often reluctant to give specific projections of how much of a profit a franchisee can expect. However, prospective franchisees can reach their own conclusions on potential profitability by analyzing the other side of the ledger—the amount of money they will need to invest in the franchise.
In particular, you should focus on the fees payable under the franchise agreement; initial investment costs; the annual operating costs; and investment required under the advertising fund.
Franchise and other fees
A franchisor is required to disclose the fees you must pay under the terms of the franchise agreement. This will include the initial franchise fee (along with any required deposits) and any other agreement-related costs.
Most prospective franchisees focus solely on the initial franchise fee and percentage of royalties charged by the franchisor. It is critically important that your analysis goes deeper than this, as there are several other fees that can have a significant impact on the cost of running your franchised operation. While each franchise system is unique, common expenses include:
- computer software fees;
- administrative support fees;
- additional training fees;
- lease negotiation fees;
- national marketing fees;
- internet hosting fees; and
- local marketing advertising fund contributions.