The 3 'R's Of Franchisee Expenses

Some people may have the view that since everyone needs food, acquiring an F&B franchise is the way forward. Others may choose a retail concept instead, preferring a lower level of operational overview. Whichever the case, prospective franchisees must know that once they sign on the franchise agreement, they are also taking on a few expense responsibilities that must be met on a regular basis.

But most often, it is only considered how much revenue the business can potentially make, while neglecting how much expenses the business needs to bear. Obviously, higher expenses leads to a more stressful situation. And ultimately, these expenses determine the rate of return on investment, and subsequently how much profit is generated at the end of the day.

Related: The Financial Side Of Searching For A Franchise

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Rent

Unless the business is online-based or the property is paid off, rental payments are unavoidable and should represent a major portion of operational expenses. While having a high-traffic location with the right target market around is great, prospective franchisees should also consider the rental price of occupying such a space. Basically, the better the location, the higher the rental rate, so choose a location with a rental rate that the business can realistically bear. Furthermore, most businesses need some time to get its foundations before seeing sales take off. Unless some serious risk-taking is preferred, assume worst case scenario and have some financial cushion set aside for rent payments for the opening few months.

Royalties

Generally, there are two types of computations for royalties — percentage-based or flat fee — with both having its own pros and cons in different scenarios.

Percentage-based

A percentage-based royalty is tagged to the performance of the business. Regardless of how much revenue is made, franchisees need to submit the specified percentage of revenue to the franchisor.

Flat Fee

A flat fee royalty is is determined at the start of the contract and the specified amount must be fulfilled by the franchisee regardless of the performance of the business. While flat fee royalties may be better if the business is out-performing forecasted revenue figures, it could be a disasterous arrangement if the business is performing below par.

In some instances, franchisors may choose to implement lower royalty rates during the starting phase of the business. This is to allow new franchises to have some breathing space and find their footing while gradually increasing sales.

Repairs & Maintenance

While different franchises have different repair and maintenance concerns, all businesses will face these issues at some point because things will wear down. The key is to handle repairs and maintenance issues when they come up so as to avoiding higher costs down the line. To get an idea, prospective franchisees need to find out the types of potential repairs that could be expected and the costs that come along. And for maintenance, understand which are those that will require ongoing attention.


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