Estimate The Cost Of Franchising

No business can afford financial surprises. You must know if you can afford the costs of franchising before you begin the process. You cannot collect any fees or royalties until you have legally established your franchise. When you’re developing your franchise you’ll incur costs with lawyers, accountants and consultants. Once you have the franchise formed, you’ll incur the cost of advertising and trademark protection.

It’s reasonable to expect to spend between $25,000 and $40,000 developing your franchise. The majority of this is due upfront. You must make sure your current business operations can sustain this kind of cash outflow.

Expect these minimums as you establish your franchise:

• Incorporation of holding company for your franchise: $100 - $300
• Trademark $1,500 - $3,000
• Creation of UFOC $15,000 - $20,000
• Audited financial statements: $2,000
• Registration of UFOC in home state: $250
• 6 months advertising with online franchise sites: $6,000
• Addressing Infringements: $500 each

Several of these costs are recurring. The UFOC has to be updated and registered annually. The financial statements may have to be audited annually. Infringements have no timeline and advertising is ongoing.

Forecast The Cost Of Disclosure

You need to know and budget for the cost of writing and filing the Uniform Franchise Offering Circular (UFOC). It has to be completed and filed before you can sell a franchise, which means you will be incurring costs long before you receive revenue.

A reasonable legal fee for creating the UFOC, which includes an initial interview with you as well as ongoing communication, is $15,000.

You must file your Notice of Franchise Offering in the state in which you do business. You will file with the Office of Attorney General. Fees vary state to state, but you can reasonably expect $250. This is a recurring annual fee.

Prepare For Audit

Some states require that the financial statements in your Uniform Franchise Offering Circular be audited. If you do need an audit, expect to spend 4-6 weeks and at least $3,000 having it prepared.

The audit is performed by an independent Certified Public Accountant. Normally your accountant does not perform your audit. Audits are done in accordance with generally accepted auditing standards and their purpose is to express an opinion about whether - or not - a company’s financial statements have been presented fairly and without material misstatement.

Before beginning the process, the auditor will provide a retainer letter listing audit objectives, management responsibilities, audit procedures, administration and fees. You must agree to and sign this letter, so be certain you understand it.

At a minimum you will be expected to provide:

• Electronic copies of your books
• A copy of your Articles of Incorporation or Articles of Organization
• Copy of board minutes
• Copy of any promissory notes
• Copy of year-end bank statements for all bank accounts
• Copy of year-end bank reconciliation for each bank account
• Copies of invoices for any purchases in excess of $2,000 of office equipment, office computers, office furniture or leasehold improvements
• Copies of any leases entered into
• A schedule of accrued accounts payable as of year-end

The more complete the information you provide and the more timely the manner in which you provide it, the less your audit will cost. It behooves you to work cheerfully and candidly with your auditor.