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REDUCING FRANCHISE DEVELOPMENT COSTS - BUDGET FOR FRANCHISING A BUSINESS

Published: 06/08/2009 by Kevin B. Murphy, B.S., M.B.A., J.D

Question
Our company is planning to franchise and a franchise consultant tells us his company needs to draft a franchise operations manual for us, as well as something called a Franchise Disclosure Document. They've quoted a $50,000 fee to do this. Any recommendations or input on whether this is a reasonable charge? Anything we can do ourselves to reduce it? $50k is a lot of money for our company to spend. Thanks for your time.

Answer
Your question covers a number of topics, so I’ll go through them one by one.

FRANCHISE OPERATIONS MANUAL
The Table of Contents of your Franchise Operations Manual is disclosed in the FDD (Franchise Disclosure Document), so technically you need a Franchise Operations Manual to franchise. The rub comes in who is the best person to draft the Manual. There’s some great information about this topic and writing a Franchise Operations Manual at:

franchise operations manuals

Bewildered by the new business of franchising, with its legal requirements, franchise disclosure documents, operations manuals, training programs, etc., many companies delegate franchise manual drafting responsibility to a high-priced franchise consultant. But using someone to write your franchise operations manual who knows literally nothing about your business and is learning from scratch at your expense, never makes any sense when everything is considered objectively.

I’ve developed a three-step approach to writing your own franchise operations manual, a best practice approach based on 29 years of writing, editing and reviewing hundreds of franchise operations manuals. This approach produces truly customized, professional manuals and eliminates having to pay a franchise consultant $20,000 or more for this relatively simple task. The three-step approach is covered in the link provided above.

FRANCHISE DISCLOSURE DOCUMENT (FDD))
The legal threshold for selling franchises is preparing (and in some franchise registration states, registering) the Franchise Disclosure Document. The FDD used to be called a UFOC but there was a name change under the new FTC Franchise Rule that became effective in 2007 and the required format in all states starting July 1, 2008. There’s some good articles about FDD’s at: FDD Evaluator

COST TO FRANCHISE A BUSINESS
Although the franchise consultant has offered to draft your Franchise Disclosure Document, unless they are also licensed attorneys (which hardly any are) doing this is the unauthorized practice of law. Most franchise consulting groups that sink to this level include fine print in their contract that you need to hire your own franchise attorney to review everything they do. This doesn’t get them beyond the unauthorized practice of law violation. It also means you pay the piper twice – the franchise consultants and your attorney.

Regarding the $50,000 fee they quoted, it’s not out of the ballpark compared to what other consulting groups charge – but it is excessive. And does it, for example, include strategic franchise planning? You need a lot more than a franchise operations manual, an FDD, an invoice and a handshake to succeed in franchising – especially these days.

A reasonable benchmark for franchising a business is to budget about $30,000 for strategic franchise planning, assistance in planning and editing your franchise operations manual, as well as drafting the Franchise Disclosure Document (FDD). If you're smart and use an experienced franchise attorney with an MBA and franchise ownership experience, you won’t need to hire a separate franchise consultant for strategic planning and drafting your franchise operations manual. This will save you at least another $20,000 to $30,000, possibly more. See our detailed Franchise Development Budget for 2009 below

THE MOST CRITICAL ASPECT OF FRANCHISING A BUSINESS
Based on my almost three decades of experience in the franchise industry, working on over 500 franchise assignments, there's a critical post-documentation aspect that most new franchise companies fail to address. It is the training and hand-holding that should be given as new franchise companies enter the new business of franchising. Mistakes made early on (and there are many for the ill-prepared and untrained) can cost tens of thousands of dollars, undermine the entire franchise effort or haunt the company for decades to come.

It’s crucial to have a franchise expert train the new company and provide ongoing feedback in franchise best practices, like adopting the proper franchise organizational structure, franchise marketing techniques and media choices, interviewing prospective franchise buyers, selling and documenting franchise sales, effective franchise training and start-up, franchise support and implementing a franchise advisory council. Although you can expect to spend another $6,000 on this training if purchased in a bundled package, it's one of the best investments your new franchise company will ever make. One immediate return on this investment is not having to hire an outside franchise person to help run the new company. The overhead associated with hiring permanent franchise staff is substantial.

Kevin B. Murphy, B.S., M.B.A., J.D.
Mr. Franchise
Franchise Foundations