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Steven R Pietro looks at the process of buying into a franchise

By September 24, 2018 No Comments
Steven R Pietro

Buying a franchise, widely regarded as one of the quickest ways to get a new business up and running successfully – Steven R Pietro

Owning a franchise has many benefits, from operating under the umbrella of an established brand to a proven customer base. Ready-to-go marketing materials, and a predefined product range. According to Steven R Pietro, however, profitability often remains largely a function of cost, even for franchisees.

An established corporate lawyer, Florida-based Steven R Pietro explains that while franchise businesses may provide something of a fast track to success, the associated costs are often significant. By default, these will include an initial franchising fee, annual franchise costs, and any ongoing royalty payments. “While annual franchise costs become usually fixed, royalty payments become typically based on revenue. Because of this, so will increase as the business grows,” says Steven R Pietro.

Franchising

If an individual is purchasing an existing franchise business, further costs will apply. “Buying an existing, established franchise business is by far the most expensive route,” Steven R Pietro explains. Further to these costs, however, and all too easily overlooked, the lawyer is quick to refer back to an earlier point. “Profitability,” he says, “is likely to be a function of cost, above and beyond fees and royalties.”

“Even for franchise businesses,” Steven R Pietro continues, “advertising and marketing are vital. Whether advertising gets handled by the individual franchisee or the brand, or franchisor, failure to effectively ‘double down’ here can very quickly be the death of a new franchise business.”

According to Steven R Pietro, regional and market-specific advertising is crucial. “Marketing costs absolutely must factor any franchise business plan,” he reveals. While the corporate lawyer is generally happy to recommend the franchise business model, he’s also keen to highlight the potential obstacles, chief among which, further to cost implications, is sourcing restrictions.

“Almost all brands or franchisors will stipulate not only which products must get stocked, but also where they must be purchased from,” explains Steven R Pietro. “This can potentially limit profitability, which is why volume, and thus marketing and advertising, are vitally important,” he adds.

Sales Restriction and Debt Servicing

Other obstacles, says Steven R Pietro, include sales restrictions and debt servicing. “Much like sourcing restrictions, sales restrictions limit which products can sell, and in which markets.  This however is largely a staple of owning any franchise business.”

Steven R Pietro adds that while there may be a temptation for franchisees to stock additional higher profit margin items. This will almost always persist as unacceptable by a brand or franchisor.

Lastly, he touches on debt servicing. “If a franchise is started with lender financing, ongoing debt servicing obligations must abide. With that said, this is not specific to franchise businesses and would apply to any new venture started in this way,”. Steven R Pietro adds in conclusion.