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What do Franchisees Typically Have to Pay to the FranchisorWhat do Franchisees Typically Have to Pay to the Franchisor

Questions to Ask When Buying a Franchise (featuring Steve Stovall of BeneTrends)

Transcription:

Amanda: Let’s talk a little bit more about the different fees. So you mentioned, you know, the franchise fee, which I think most people are familiar with. The construction fee or you know, fee to retrofit some kind of a brick and mortar facility, technology, signage. What other fees do franchisees typically have to pay their franchisor?

Steve: Let’s see. There is usually some kind of marketing fee. There is an advertising fee. There are fees for education, there are fees for training and I’m sure I’m going to forget one or two, but as you are looking in the franchise disclosure document or FDD, the fees of what you have to pay on an upfront basis and fees that you pay from training on, they’re all listed when they’re due and what fees they are. And if you have a franchise disclosure document, you should probably be talking to some sort of finance company or a bank to understand where you’re going to be putting money in and where the bank would be allowing a loan that will pick up the rest.

I would like to think, and I know it’s not true, but it is getting a bit clearer every day, but I think that people are coming in more and more educated every day. So the fact that I say that they should get some sort of financing information or education, I think that that really becomes a done deal. It becomes not a problem for them because more people are going online and as they’re looking at a franchise opportunity, more franchises are putting a logo for financing on their website and as they’re searching or googling a franchise’s information, 9 times out of 10 some sort of financing is gonna pop up.

So financing should be top of line for the franchisee and for the franchisor. I think that maybe 10 years ago it wasn’t as prevalent as it is now, but more often than not, I find that people want to know how they’re gonna pay for this or get generally prequalified. And if they do not, then the franchisor will say, hey, why don’t you call BeneTrends, get pre-qualified and let’s see how you’re going to pay for this. And this usually happens rather early on in the process.

And I would say, you know, to any potential franchisee out there, if that is not happening, please call me at 267-273-4319 and let’s get you ready to go to discovery day. Because if everything goes right at discovery day, you typically have about 10 business days until the franchisor wants a franchise fee.

And because there is a lot of competition going on behind the scenes, your $50,000 may put you one day ahead of someone else that’s interested in a territory and it’s literally first come, first served. So no one should be bound for failure if they go to a discovery day and they like what they’ve seen and heard, they should be ready to go and they should have a plan in place to get the financing that they need.

And I know I keep repeating this, but it’s not like you are walking down the street and say, “Oh, hey, I think I’m gonna buy a house today,” or, “I think I’m gonna get married today,” or, “Wow, that Porsche is really good looking. I’m gonna buy that car today.” Big purchases in people’s lives typically require some sort of planning and franchising is no different. So you have to go in with a plan to make sure that you’re qualified, that you have your money available when you need it, and you can do this without gutting your savings account or your checking account or your 401(k) or your home equity or whatever means of financing you’re going to use.

Amanda: Absolutely. Again, more great information, but I have two follow-up questions for you there. So you mentioned a bunch of different kind of types of fees, right? We have the franchise fee, technology, marketing, advertising, training. Do you find that they’re pretty standard across different industries or is there something, you know as you’re reading through that franchise disclosure document and you see something that pops out at you, would it kind of strike somebody as odd or are they pretty much the same like I said, across industries, maybe with some give or take here and there?

Steve: That’s the great thing about the franchise disclosure document. It is pretty much the same, in the same order and has the same information for whatever franchise you’re looking at. And there may be a fee for, you know, software upkeep or something like that that might be outside of the regular franchise fees but by and large, most franchisors have the same fees in the same place in the FDD or franchise disclosure document. There may be one or two outliers, but they are probably not very significant. So if you looked at one franchise disclosure document, you’ve pretty much looked at them all and the fees are going to be pretty standard right down the line. The amounts obviously will differ but the fee designation will be fairly ubiquitous for any franchise.

Amanda: Good to know. So my other question, a follow-up question was it is very similar or at least strikes me very similar to buying a house, just kind of that process, right? We talk about prequalification where I’m not gonna go look at houses that are half a million dollars or $1 million when I’ve been prequalified for $250,000 as an example. So it’s kind of that, a similar concept, right? Getting your financial ducks in a row so to speak, and figuring out where is my money, what options do I have here as far as 401(k) and cash and loans and all the other stuff, and then figuring out where that matches up. Because to your point, you don’t want to get to discovery day and be, you know, neck and neck with somebody for a territory that you really have your eye on or is close to where you’re living or all those other things only to then try and figure out. I’m not gonna put an offer on a house to figure out that I’m actually only prequalified for half of what that house is gonna cost. So a very similar, at least the way that you explained it and it makes sense to me, a similar equation there as buying a house and purchasing a franchise. Obviously the numbers look very different, the process looks different. But would you agree with that?

Steve: I certainly would. And I would say, unless your specification and expertise lie in financing for businesses or franchises, you really are doing yourself a disservice if you don’t talk to BeneTrends or any of the other financing companies out there. As a matter of fact, just like you should probably weigh a few franchises against one another before you go to a discovery day or two, you should be weighing one franchise finance company against another to make sure that they have all the services that you need. But by the time you go to discovery day, it’s no time to say, “Oh, geez, I forgot. How am I gonna start paying for this?” It’s literally, you know, would you go hunting without loading your gun?

And you really want to load your gun before you do anything and the sooner that you get your gun loaded or the sooner that you identify the ways that you’re able to fund a franchise opportunity, the better. I’m not talking to people that have millions of dollars in cash or millions of dollars in the stock market necessarily, but I’m talking about the, you know, person that is still working and wants to do something that is more passive and they need to get their money in order or I’m talking about the newly laid-off person who needs to provide a salary for themselves once their severance runs out and have money for a franchise. I’m really talking to those people as far as identifying and locking down first of all, how much franchise you can afford and second of all how you are going to afford that franchise. And that should be done long before you decide that you’re gonna go to a discovery day or two.

Amanda: Absolutely. I couldn’t agree more. And I just, I want to not really question, but just want to circle back to what you talked about, about education and about being an educated consumer. And more and more, you said you’re seeing people come through the doors who have done their homework and they not…I mean not that they’re to the level that you are, right? That’s why we need folks like you involved in this process, but that they know what they’re talking about and they know what they should be looking for. So, any resources aside from our wonderful podcast, Franchising with Purpose, that folks can get educated about the franchising opportunity and what that looks like because again, education is so, so important in this and any major life decision?

Steve: Exactly. And let’s say that you’re intimidated or not far enough along the system or for whatever reason you don’t call a BeneTrends or someone similar to a BeneTrends, at the very least you ought to go to your local SCORE office or your local Small Business Development Center or SBDC and you can google them at score.org or sbdc.com but these are quasi-government offices that will help you to get locally prequalified and they’re literally working to develop businesses in your specific area. So if you don’t want to call a BeneTrends, please call your local SCORE. Call your Small Business Development Center. Go spend some time with them and let them help you develop what you qualify for, what your options might be, and then start looking for your franchise. But by the time, again, by the time you are ready to go to discovery day, you should know whether you’re going to get a loan or whether you’re going to do a rollover or you’re gonna do both. You should have… The question of how you’re gonna pay for it should not exist when you go to discovery day. It’s in the name. you’re literally going to Chicago, Philadelphia, New York, Dallas, wherever, you’re literally going to a franchise to discover whether or not there is a fit between you and the franchisor and you’re there in the franchise offices to validate that point or to say, “You know, this isn’t gonna work. Thank you for your time,” and leave.

Amanda: Right. Absolutely. And just to remind our listeners, you keep talking about SCORE. And it’s funny, I actually got an email from them last night for my local chapter of SCORE, I’m not sure how, but it’s the Senior Corps of Retired Entrepreneurs. So if you are searching for SCORE, again S-C-O-R-E, but Senior Corps of Retired Entrepreneurs, all great information here. So let’s talk a little bit about some of those fees. We’ll go back to the fee section of this because we’ve talked a lot about the preparation involved and getting all of your, again, financial ducks in a row before you get to discovery day because you don’t want to get that point and pull the trigger only again to find out that the gun’s not loaded, if we talk about loading our weapon before we go hunting, which I like. You know, it makes sense.

You don’t want to get all the way out there into the woods and you are up in your tree stand and you say, Okay, I’m gonna do this,” and pull the trigger, only to find out that I didn’t prepare, right? If we go back last time, we talked about, you know, being prepared, being organized, all that stuff and how that kind of feeds through the whole process of being a well-informed potential franchisee and the questions that you ask in that whole dating process, right, because we talk about, which we do a lot, about franchising as a marriage. It’s a partnership. It’s a two-way street. And it should kind of be looked at the same way in a lot of aspects obviously. But let’s talk about some of those fees specifically. So you mentioned…you know, I think franchise fee we talked a ton about so I don’t feel like we need to rehash that one. Construction fee seems pretty self-explanatory. But I’m having a big question mark in my head here next to this technology fee. And you talked about that there may be, you know, some franchise disclosure documents that you look at that have a software upgrade fee involved. So what typically would you say a…or a technology fee covers? Is that gonna cover all the technology I need to get up and running or are there still gonna be things that I should be prepared to purchase? What does that typically cover?

Steve: So the technology fee is literally an interface so that you and the franchisor can communicate directly. You don’t have to send them a Gmail or something like that. You’ve got a franchise network that only Griswold franchisees can get into. So you would have the proprietary network that they can get into and you would have proprietary software for the management of their company. You would also have probably some sort of proprietary and directed marketing ideas for the franchisee to use. And you may even have a book, worksheet like for them to put their monthly or their annual revenues and things like that into, like a QuickBook or something like that. So different franchisors have and require different things in their proprietary software. But I would say that just in general you would have a some sort of directed marketing, some sort of a advertising idea.

You may even have a forum where franchisees can communicate with one another and you would definitely have a QuickBook or something like that, a software, that they need to pay for the upkeep of that software and the security of that software that they’re going to be making use of for the next 10 years. And I will say, as far as it being a marriage between an individual and a franchise, if you look at statistics, the average marriage only lasts about six point something years and a franchise agreement is generally 10 years. So you are literally signing up for something that is in statistical study going to last almost twice as long as your marriage. So if you’re signing up for something like that, you better for goodness sake sure do your homework.

Amanda: Interesting. I did not know that, a little over six years. Wow.

Steve: I did some studying this weekend before I came on.

Amanda: Yeah. And like you said, most franchise agreements are quite a bit longer than that, so you really want to make sure it is, I don’t want to say until death do us part, but you know, this is a big investment and a big choice that you’re making. So you mentioned a lot of things with that technology fee as far as, you know, systems and interfaces with the franchisor and access to different platforms and things of that nature. Does that typically include hardware as well or is that something that I should be expected to cover? You know, getting my office up and running with computers and printers and copy machines and all that stuff that goes into…you know, getting the internet set up and all that stuff, is that covered or is that an additional expense? And it may differ by different franchises, but just typically, what do you see?

Steve: I would say that it probably differs by different franchises. A franchisor may have a brand of computer or a credit or something like that that they recommend over another. But I would say that a franchisor, as long as you have the machine that is able to support it, a franchisor is not going to care if you have an HP or a Dell or a Lenovo or Apple product as long as you’re able to receive and disseminate the information that is required.

Now, some franchisors may take an extra step and do some work so that you’re able to get an HP product at a bit of a discount because you go to a vendor or proprietor that the franchisor has designated as “the place to go for your computing needs.” And that’s excellent, but typically a franchisor will not require that any specific machine is used. They just require that it be able to execute the programs that the franchisor requires the franchisee to use.

Amanda: All right, great answers. And kind of along that same vein as we talk about, you know, purchasing technology, whether that’s at a discount through a relationship that your franchisor has, or if you’re kind of going it alone and figuring out the best thing to get your office up and running, there are a lot of expenses in that first year, right, as we talk about office space, and some of that’s covered in those fees and some of it may be outside of that, but why is it so important to have capital saved for that first year of business? And I may have just answered my own question, but let’s talk a little bit about kind of what it takes to get up and running in that first 12 months.

Steve: I would say that while the franchisor has taken a homogenized look at what it had taken all of their franchisees and they’re basically able to give you average cost across the board, I would say that in really practical sense, if the franchisee goes on that number specifically, they might run into some surprises when they’re actually trying to get a franchise opened. And I would follow that up with, a franchisee typically does not know how much it’s going to cost them to open until they literally are open for about three months because they get all of this stuff in the FDD filled out. If operating capital is short because they’re in a more expensive market, if they need a brick and mortar and construction has had overruns, then they’ll need more money. If it takes them a bit longer to get things going than the franchise disclosure document says, then they will need more money to make sure that they don’t miss payroll payments or SBA loan payments or utility payments or whatever the case may be.

What the franchise disclosure document does is give you a guideline on what you should expect the fees to be and the costs to be, not an exact receipt of what those costs are gonna be. So if you are a prudent thinking franchisee, you’ll want to pad the franchise disclosure document disclosures by at least 15% to 25% because if you have more money than you need, you can always advertise more. You can always market more. You can always use that money to pay down on your small business loan or what have you. If you don’t have that money available, then you have some hard decisions to make pretty quickly, like do I pay my staff, do I pay my rent, do I pay my franchise fee? And not paying any of those fees are going to be a bad decision. So have more…

Amanda: Right. That’s not a question you ever have to want to have to ask, especially not in those early stages.

Steve: Exactly. Exactly.

Amanda: Well, that kinda leads me into my next question, and I may actually answer this while I ask it, but my next question is, what advice would you give to somebody wondering how much they should save? So we talked about padding it, you know, 15% to 20% to 25%, but how much somebody should save for a franchise investment? And I’m looking at this question, I’m thinking, well, my very first step is once I have kind of gone through, and for anybody who’s been listening to Franchising with Purpose from the beginning, we talked a lot about kind of that inner conversation and the conversation that you have with yourself when you’re really considering making that transition from jobber as we call it, to franchisee and considering striking out on your own and building something from the ground up or purchasing something that’s already there. But it almost makes sense to me that once I’ve made that decision, my next phone call is probably to you, Steve, I gotta be honest, and figure out kind of what that looks like, how I should start saving and going about saving before I even maybe look into potential options. So what advice would you have for somebody kind of in that role because my answer to the question is I’m calling you?

Steve: Well, I would actually advise anyone that is in that position I would want to talk with them a little bit after they’ve had conversations with the franchisees that have preceded them. If I am opening in Philadelphia and I know that the franchisor in New York City, in North Jersey and South Jersey has spent $400,000 to get their doors open, then I should expect somewhere around there based on the size of my market and the cost of living in those markets. So I always encourage people, I can’t tell you exactly how much it’s gonna be, but have you spoken to anyone in your town, in your state, in a financially compatible area in the country about getting opened? And I would ask them a really simple question, you know, based on the franchise disclosure document. And this is one franchisee or potential franchisee speaking to an experienced franchisee, based on the franchise disclosure document, would you say it cost you more to open your doors or was the price about right? And if they say more, perhaps it is because they’re in an expensive market. But at the end of the day, the franchise disclosure document tells you one thing. If someone says, “You know, I would add that 20% just to be sure,” you better be darn sure that I’m going to pass my expectations by 20% and be ready for any cost overruns.

So I think that obviously speaking to a good financial person is imperative. However, speaking to people that have practical experience in the exercise or objective that the franchisee is looking to do and speaking to people with life experiences is going to be very important.

Amanda: Absolutely. And Steve, that’s why you’d be my first phone call because you would tell me to call somebody who’s done it in the area that I’m looking to do this in and talk to them. So I know I can always count on your advice.

Steve: Well, you know, I like to be a resource for people and that is exactly what I would tell them or I would at least ask them in their conversation with franchisees what number has come up. And if they say that, “I haven’t spoken to any franchisees,” I would say, “You know, let’s get you talking to some people.” And I would probably call their rep at that specific franchise and say, “Hey listen, you know, Barney Smith has not spoken to any franchisees and they want me to tell them how much it costs to open. I think it’s a better idea for them to actually speak to some people that have experienced that. Are you able to help Mr. Smith out?” And that franchisee will say, “Steve, thanks for the info. I’m on it. Give him a week and we’ll have that number for them.” By the same token, I can collect some information from the franchisee, get them prequalified for a number and hopefully that number that they’re prequalified for will sync up with the numbers that they’re hearing out in the wild if you will, and we can get some financings on.

Amanda: Absolutely. Well, again, giving me a lot to think about, answering a lot of questions that I have and hopefully some of our listeners who have kind of been on this journey with us and figuring out how to really identify if this is the right transition for them, what the right industry is, different companies and now finally into the financing piece, but anything else you want to add or any advice that you would give somebody looking to pursue a franchise opportunity?

Steve: Well, I would say to anyone doing that, obviously get your finances in order as quickly as possible. But when you’re interviewing franchisees, listen, they’re small business owners. They are probably not able to spend an exorbitant amount of time answering detailed questions, but if you ask them what their background is, if you ask them what a day in the life of a franchisee looks like, if you ask them is the parent franchisor helpful when you have a problem, if you ask them, you know, would knowing if you knew now what…or rather if you knew then what you know now would you do it again, those are all questions that I think any franchisee would be happy to answer very quickly. And for people that are looking to understand how much money they can make and they call a franchisee and say, “How much money can I make?” and they have a dial tone on the other end, that’s because nobody’s going to tell you how much money they make.

However, if you go to a franchisor, whether it’s in person or on the phone and you tell them that you come from a career where you’re making $100,000 per year and you ask them if that’s replaceable in your franchise, I think that you get closer to a real answer because you’re not putting anyone on the spot. So it’s not what you ask, it’s how you ask. And literally, you cannot do enough pre-investigation before you go to a discovery day. So I encourage everyone to learn as much as you learn. Whittle it down from five franchises to two. Maybe you go to discovery days to weigh that franchise versus this franchise and make the most educated decision possible and calling steve@benetrends.com or sending me an email. We’ll make sure that you get the best financing information in the industry.

Amanda: Absolutely. And Steve, I keep coming back, you know, the last couple episodes that we really just keep coming back to the same three things, right, to be organized, be prepared and work with people that you trust. From a franchisor perspective, from finance perspective, there’s all kinds of different people involved in this. And you keep coming back and I don’t want to harp on it, but it’s so, so important is, you know, being prepared, being organized and working with somebody that you trust. So thanks so much for being here. Again, if folks want to get a hold of you, if they said, “You know what, I’m ready to make this decision and I want to see how to make this work financially,” how can they reach out to you?

Steve: So my email address is literally steve@benetrends.com, that’s benetrends.com, or just simply dial the cell phone 267-273-4319 and I will be happy to answer any and all of the prospect’s questions and hopefully help them make a good decision on a franchise or a non-franchise business to buy.

Amanda: Well, fantastic. Thank you so much for being here. As always, thanks for all the great information and tips that you shared with us. Looking forward to hopefully doing this again in the future and stay in touch.

Steve: I look forward to the next time. Have a great day everybody at Griswold and have a great day all of you franchisees.

Amanda: You too. Thanks, Steve. Bye

Steve: Bye.