Have you heard the term “turnkey” and wondered what it means in terms of franchising? Turnkey basically refers to a franchise package so complete that everything you need to start the franchise will be done for you.
Sounds like a great idea, right? You pay your fee, and the franchisor researches the location, signs the lease, builds out the location, supplies you with start-up inventory and materials, finds and trains the staff, and orchestrates the grand opening. All you have to do is “turn the key” to open your new business.
Buyer Beware
There are advantages and disadvantages to a turnkey franchise. The advantage is the amount of work and potential aggravation it can save. It may also be an unnecessary expense if the package is overpriced for what it offers.
Here are a few ways to validate is the value of a turnkey opportunity is worth the cost,
- Most franchisors offer a partial turnkey program, doing some but not all of the items mentioned above. Make sure you understand what they will help with and what tasks you’ll need to tackle yourself.
- You should expect to pay a reasonable cost for the labor involved in putting the package together, but not an outrageous price. If the price seems high, ask for a breakdown of the services provided and compare to the open market price for similar services.
- Group purchasing power is a definite benefit of franchising. You can expect to get a good deal on the supplies, materials, and services needed for the business since you are taking advantage of the buying power of the full group. Make sure you understand the savings. Some times that savings can off set the royalty!
- Ask the current franchisees about the perceived and actual value of the turnkey package. You’ll be calling them as part of your due diligence so be sure to cover this topic thoroughly. Ask them if they feel they get fair value for the turnkey package and if the process went as smoothly as they expected.
- Finally, remember that you are paying a large upfront franchise fee and substantial ongoing royalty payments to this franchisor. These are accepted costs of a franchise business. You should not also have to pay a large markup above the actual costs to put the turnkey package together. Take the time to understand all facets of the process and the associated costs.
On the flipside
Know there are always exceptions to the rule. Some franchisors do not charge a royalty but make their profit by selling you the supplies of a franchise. For example, a smoothie franchise may sell you their proprietary kiosks and ingredients rather than charge you a royalty fee. The franchisor’s profit comes from the mark-up on the products they sell you. This information is required to be disclosed in their Franchise Disclosure Document.
Again, you should expect a fair price and the best way to determine if the price is fair is to ask the existing franchisees. Ask them if they are happy with the prices they are charged and if they shopped around before signing with the franchisor to see if this was the best deal on the market.
The future of franchising
As franchising becomes more sophisticated, most franchisors offer at least partial turnkey features. They understand that it is to their benefit to provide their franchisees with every possible advantage to give them the best chance at success. A recent trend in franchising is what is called “Managed Services” franchise options. This is where the franchisor takes responsibility for not only the set-up but the day to day operations of the business. I plan to cover this recent model in an upcoming blog post. This option is designed to attract investors. As the stock market and housing market destabilize, investors need places to “park” their money and seek better returns over other passive investments. This is an interesting trend that I will discuss in a future post.
With retail franchise concepts, the franchisor is likely to provide the equipment and fixtures to the franchisee. The franchisee will then hire a local contractor to assemble and install everything. This balances the need for the consistent look and feel the franchisor wants with a level of cost control for the franchisee.
The more the franchisor provides the franchisee in the way of training, marketing, materials, products, buildouts, etc., the more consistent the brand from one location to the next. This also generates more revenue for the franchisee.
It still takes you to make it work
A true turnkey franchise is a company that supplies franchises with a business in a “condition ready for immediate use, occupation, or operation,” according to a dictionary definition. In most cases, a franchisor will go to great effort to get you up and running but you will still need to take care of a many of the start-up items yourself.
Whether a business is or isn’t turnkey, or is a partial turnkey operation, don’t forget that there is still one element of the equation that a franchisor cannot provide – and that’s the drive, talent, and determination of the franchisee to make the business successful. That is completely up to you!
