The Specific Costs Involved in Doing Business

By: Eddy Goldberg
Published: April 13th, 2018

In the previous article, we discussed in general terms the cost of starting your own business compared with that of buying a franchise. This week we dig deeper into the specifics.

• Brand recognition. When you open for business, a well-known brand name is a tremendous advantage in attracting customers and putting cash in the register more quickly than it would take for a new, independent brand. While franchisees usually pay a percentage of sales for advertising and marketing, the collective power of a national or regional advertising fund will buy a new franchisee more consumer attention than most could hope for on their own.
• Proven system. This is the old "Why reinvent the wheel?" question. Assuming a good system, product, and brand name, plus a skilled and competent leadership and support team at the franchisor, new franchisees can buy a "plug-and-play" business, ready to hit the ground running.
• Operating manual. Each franchise brand comes with its own playbook, an operator's manual built on the experience of dozens, hundreds, or thousands of units and franchisees — distilled into a step-by-step instruction book covering everyday operations. Not having to learn by trial and error, running a more efficient operation, and being able to draw on the experience of others when problems arise (and they will) should result in a lower cost of operation over time and a quicker return on investment than starting a new business where ironing out the kinks can take years.
• Training. Franchisors provide initial training for the owner-operators, and often for their managers as well before the business opens. That's part of what the franchise fee pays for. Compare that with the cost of bringing in professional trainers or of cleaning up the problems resulting from poor training (e.g., quality of goods or service, poor customer relations from your front-line employees, HR violations, etc.).
• Financing help. For new business and those no track record of success, finding a franchisor that will step up with its own financing, or that has an established relationship with a trusted lender, can save new franchisees a tremendous amount of energy and time as they seek the capital to start their new business.
• Site selection. For retail brands, especially food, finding the best location is critical for success. Build the nicest restaurant, hire the best people, provide great quality and service, and the new business still can fail, or at least perform below its potential or expectations if the location is wrong. Many franchisors have state-of-the-art site selection technology, or the money to hire a firm to do it for them — as well as the experience to know what works and what doesn't. How much would that cost a fledgling entrepreneur to buy on their own?
• Lease negotiations. Leases are a fixed cost for a business. And whether out of ignorance, or from their enthusiasm to get started, many new business owners sign a less-than-optimal deal with a landlord and be locked into it for years. That fixed cost, recurring every month, adds up over time, making the business a more expensive operation to maintain, especially during the first few critical years. Franchisors can provide experienced negotiators who can wrangle with the landlord for better terms, making the operation less costly to run and more likely to succeed.
• Build-out and equipment. Franchisors also can provide advice on how to save on build-out expenses, as well as on the necessary equipment needed for the new operation, again reducing the cost of starting a business.
• Supplies. Buying in bulk is cheaper. The larger the franchisor, the more they can negotiate with suppliers for lower-cost supplies –— not easy for a business with just one location and a limited budget.
• Management advice. One of the most common failings of small-business owners as they grow is learning the new skills required to manage a larger enterprise. Hiring the wrong manager to take the load off their shoulders will only make the burden heavier when that person doesn't work out. Franchisors have field representatives skilled in coaching or mentoring franchisees through the predictable stages of growth and expansion, even in how to add new units as they grow.
• Marketing/advertising. The collective clout of national and regional advertising and marketing campaigns provides more firepower than any individual business could dream of. And while this doesn't come free, the ROI from the nominal percentage paid into ad and marketing funds is less expensive and more effective than what most startups could ever afford on their own.

Conclusion

While it may be less expensive at the outset to start your own business instead of buying a franchise with its franchise fee and ongoing royalties, especially for those with limited capital, the goal is to survive and prosper over the long term. Measuring return on investment (in time, as well as money) must be viewed in the proper perspective, which is: Where do you want to be in 5 years or 10? Anyone who has purchased a bargain basement toaster knows the cost of repairs (or, more likely, replacement) — as well as the subpar performance from the unit, which can not only burn your toast, but your entire house. Accounting for the "real cost" of starting a business must take the longer view. What may seem a bargain in terms of price today may turn out to be very expensive tomorrow.

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