Q:
I'm looking into the purchase of a franchise that offers a
"turnkey" package. What does this term mean? What do I
get in such a package? Also, is there anything I need to do to make
sure I'm protected properly in relation to this program from
the franchisor?
A:
This is a very timely question, because we are seeing more and more
franchise companies offering such packages to new franchisees. The
answer to your first question is simple.
The term "turnkey" refers to a package that is so
complete in providing everything you need to start the franchised
unit, all you have to do is "turn the key" and open the
door to be in business. In a true turnkey package, the franchisor
would include everything from finding the site, signing the lease,
buying everything needed to start the business, completely building
out the unit, hiring and training the staff, etc.
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Most of the franchise companies that offer packages like this
are really offering a partial turnkey program. They probably do
many of the things mentioned above, but not all. For example, it is
very rare for the franchisor (even given a "turnkey"
package) to hire your staff for you.
A turnkey package program can be a huge advantage to a new
franchisee because of all the work and aggravation it can save you.
It may also be a huge rip off, and you need to do some research to
find out whether that's the case.
The challenge with these packages lies in the markup, if any,
the franchisor is attaching to the package components. You should
expect to get a great deal on the components needed for the
business since you're taking advantage of the buying power of
the chain. You should also expect to pay a fair amount for the
labor involved in having someone else do all this work for you.
What you shouldn't expect to pay is a large markup above the
actual costs to put this package together for you.
Keep in mind that you're also paying a large upfront
franchise fee, and substantial ongoing royalty payments, to this
franchisor to help you get into and effectively run this business.
Those are the accepted costs of a franchise business. A large
additional profit on the components necessary to get your unit open
for operation is not.
The quick and easy way to find out if the turnkey package
you're looking at is a great deal or highly inflated is to ask
existing franchisees. When you call them to ask your questions
about the business, make sure to cover this topic thoroughly.
Ask them if they are happy with the value of what they got. Did
they shop around to make sure they were getting a good deal? Did
the process go as smoothly as the franchise salesperson said it
would?
If you aren't completely sure based on these calls, ask the
franchisor if they provide a complete cost breakdown, by individual
component on at least the larger cost items, to the franchisee who
orders the turnkey package. Ask if the labor costs to provide this
service are a separate line item or whether the labor is built into
the cost of the components (and, if so, what the markup percentage
is to cover labor).
You can always shop around yourself, but my experience is you
won't have to. If the franchisor is making a ton of profit off
of turnkey packages, every existing franchisee will know they were
taken advantage of and won't be reluctant to tell you so.
As always, take the time to thoroughly investigate any franchise
opportunity to make sure the track record is strong and dependable
and call existing franchisees of the system to validate the
information you have received.
Jeff Elgin has almost 20 years of experience in franchising,
both as a franchisee and senior franchise company executive. He is
currently the CEO of FranChoice
Inc., a company that provides free consulting to consumers
looking for a franchise that best matches their needs. He can be
reached at jelgin@FranChoice.com.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.