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Deciphering the FDD, Evaluating Lifestyle Fit, and Understanding Fees
When venturing into the world of franchising, making an informed decision is crucial. Prospective franchisees must navigate through complex documents, assess personal commitments, and understand the financial implications of their investment. Here are three fundamental aspects to consider before purchasing a franchise:
1. Diligently Review the Franchise Disclosure Document (FDD)The FDD is an indispensable tool provided by franchisors to potential franchisees. This legally mandated document offers a deep dive into the operations of the franchise, encompassing everything from corporate history to legal obligations and financial performance. Key tips for prospective franchisees include:
Thoroughly Examine the FDD: This document contains vital information that can affect your decision. Pay special attention to the franchisor’s financial health, litigation history, and the earnings claims if available.
Seek Professional Advice: Considering the complexity and the significant investment involved, consulting with a franchise attorney or a consultant can provide clarity and direction.
2. Consider Your Lifestyle and Personal Commitment
Franchising requires not just financial investment but also a substantial commitment of time and personal involvement. Reflect on the following:
Evaluate Your Availability: Some franchises demand high levels of day-to-day involvement, while others may be operated semi-absentee. Make sure the time commitment required aligns with your personal and professional life. The Human Bean does not require franchise partners to be in the stand making coffee every day but we do require them to be involved in the business.
Family and Friends as Potential Partners: Consider the dynamics of involving family members or friends either as investors or operational partners. This can impact both the business operation and personal relationships. The Human Bean was started 26 years ago by a duo husband and wife team. We welcome family and friend partnerships.
Long-term Commitment: Franchise agreements can span several years. It’s essential to consider whether you can commit to the length of the agreement without jeopardizing your long-term personal and financial goals. Each franchise agreement with The Human Bean is valid for 10 years. Renewals are available for franchisees in good standing.
3. Understand the Financial Commitment: Fees Involved
The cost of entering a franchise goes beyond the initial investment. Ongoing fees can significantly impact your profitability:
Franchise Fee: This initial fee secures your entry into the franchise system and is generally non-refundable. The franchise fee for The Human Bean is $30,000.
Royalty Fees: These are ongoing payments made to the franchisor, typically a percentage of the gross sales, and compensate the franchisor for continuous support and use of the brand. The Human Bean does not collect a royalty fee on sales. We earn revenues from bulk sales of coffee beans, cups, lids, and other supplies to our franchise partners.
Marketing Fees: Depending on the franchisor’s structure, you might need to contribute to both local and national marketing efforts. This could be through direct payments or allocated spending on local advertising. All The Human Bean locations contribute 1% of gross sales revenue to a Brand Fund for the promotion of the THB-branded product and drive-thrus.
Prospective franchisees must thoroughly assess these three critical areas before making the leap into franchising. Understanding the FDD, evaluating how the franchise fits into your lifestyle, and being clear on all financial commitments are pivotal steps to ensure that your franchise journey is successful and fulfilling.