Franchise Construction Cost Structures

We see franchises surrounding us in our lives today – whether suburbia, city or rural small town America, brick-and-mortar franchises are everywhere. They can be retail stores to motels to restaurants and work-out gyms. But franchises can be different from other typical businesses in definitions of business ownership, cost structures, and who pays for construction fees.

Costs are not a 50/50 split for franchises – but then again neither are the profits. The franchisee often has to pay more upfront, but then can reap the long-term deeper profits. Buy-in fees are the first costs paid by the franchisees. But even before these payments can be made, the franchise has to approve the franchisee based on overall net worth or liquid funds. Which can involve additional upfront professional fees for the franchisee, such as legal or accounting costs.

Franchise Construction Cost StructuresHowever quickly thereafter can come the construction needs and affiliated costs. These can include the franchisee needing a real estate agent, zoning and of course a builder. Contractors have to “build out” a space for franchise requirements. The construction and look-and-feel requirements will be provided by franchise corporate (think about how the different stores in a fast-food chain all look the same). Architectural blueprints, textile samples and color swatches all would be provided. However the actual construction costs to meet these requirements fall on the franchisees themselves.

For franchises, the corporate flagship store is “branded” first – meaning it is designed and built (or renovated). Then, when all requirements and paperwork have been approved by corporate, the plans are “rolled out,” in construction, across the other locations or franchises to develop. Franchises can frequently be “rebranded.” This doesn’t mean the franchisees are required to immediately drop everything and renovate their stores – but they are expected to do so by the franchise corporate after a certain amount of time. But these building and renovation costs do fall on the franchisee to pay – whether first construction or renovation years down the road. And the construction elements of these rebranding phases can include everything from wall placements to industrial equipment to flooring and light fixtures. The entire interior space may be redesigned and rebuilt.

Of course there are the more typical, day-to-day costs for franchisees. These can include loan interest, salaries, maintenance, rent, utilities and even employee uniforms. And there are ongoing franchise fees and even regular construction upkeep.

Promotion and advertising is very important – especially for a new business – even if it is part of a franchise. Consumers need to be made aware of the new location and its offerings. Awareness is vital – and businesses want consumers to be continuously reminded of their presence. The franchise itself issues its ongoing advertising and publicity – and franchisee fees pay for this. However the franchisees themselves should expect to pay some funds for their own advertising for their location – especially when they are new to an area.

However franchisees can get some financial help, believe it or not, from their landlords. When commercial occupants negotiate leasing fees, some construction costs can be built in and offset by the landlords themselves in the contract. Landlords often float some occupant outside building and renovation costs to incentivize the occupants to sign with them in the first place.

With all of these costs stacked up for franchisees, are there financial advantages for franchises over brand-new business models in the first place? For starters, all of the above costs are (mostly) calculable in advance. A franchisee can identify what the construction and franchise costs are going to be. These and other costs can be communicated by the franchise and even other franchisees. Common business projections and profit growths over time can also be communicated by the franchise and other franchisees. Meanwhile, the ongoing marketing and promotions by the franchise itself, and overall marketplace growth in brand awareness, can all contribute to additional sales at the franchisee level. These can all be profits which are harder for a non-franchise business to conceive in advance, and identifiably grow long-term as a single location.

Want more? Read about Buildrite’s roll-out construction services.