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Franchising: A Cheaper Alternative?

Many entrepreneurs are shying away from a return to corporate America after a round of layoffs catalyzed by the recent economic downturn. Instead, these pioneering businessmen and women are choosing ownership in a franchise.

This opportunity may initially appeal as a relatively inexpensive way to begin a business, but those looking into buying a franchise need to be wary of possible hidden costs.

Differentiating Between Fees and Real Start-Up Costs

It may be fairly economical to buy a franchise, but does the purchase price cover everything needed to open the business? More often than not, the answer is no. In addition to the initial fee, funds are needed for:

  • Working capital reserves
  • Real estate costs
  • Permit and license fees
  • Equipment rental or purchase costs

Working capital reserves are funds set aside to cover the first few months of operation. Generally, businesses do not make much of a profit during the first few months and use these funds to cover initial fees like rent, utilities and other operating expenses.

The franchisee may also need to obtain permits and licenses ranging from pollution control and sign permits to a liquor license. Those required will vary depending on the business. In addition, the franchise will often require particular operating equipment, a fee also covered by the franchisee if not specifically covered within the initial franchise agreement.

The initial franchise agreement can be negotiated to include some of these costs. As a result, it is wise to seek the counsel of an experienced franchise lawyer to review the rights and obligations contained within franchise contracts and ensure your rights are protected.

Source: NuWire Investor, “Cheap Franchises Can Cost Big Bucks,” March 16, 2012.

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