You’ve probably heard the term “turnkey” many times and may have wondered what it means in terms of franchising. A turnkey franchise package is one that provides absolutely everything you need to start the business; it’s all already done for you.
On the surface, this sounds like a great idea. You pay your fee and the franchisor researches the location, signs the lease, builds out the unit, supplies you with start-up inventory, 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: the Pros and Cons of a Turnkey Franchise
There are advantages and disadvantages to a turnkey franchise. While it can save you work and aggravation, it may involve unnecessary expenses if the package is overpriced for what it offers. Let’s explore ways to evaluate the value of a turnkey package.
Most franchisors offer only a “partial turnkey” program, performing some but not all of the tasks necessary to get the business up and running. Make sure you’re clear on exactly what they will help you with and what tasks you’ll need to tackle yourself.
You should expect to pay a reasonable price 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.
Collective purchasing power is a benefit of franchising. You can expect to get a good deal on the supplies and inventory needed for the business since you are taking advantage of the buying power of the chain. Make sure you have an understanding of the savings.
Ask current franchisees about the value of the turnkey package. Be sure to cover this topic thoroughly when you call franchisees during your due diligence process. Ask them if they feel they got a fair value for the turnkey package and whether the process went as smoothly as they expected.
Finally, remember that you are paying a large up-front 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 to put the turnkey package together. Take the time to understand all facets of the process and the associated costs.
Variations on the typical turnkey franchise
There are always exceptions to the rule. Some franchisors do not charge ongoing royalties but rather make their profit by selling you the components of their franchise. For example, a smoothie franchise may sell you their proprietary kiosks and ingredients rather than charge you a royalty fee. This franchisor’s profit will come from the markup on the products they sell you.
Again, you should expect a fair price. The best way to determine if the price is fair is to ask the existing franchisees. Ask whether they are satisfied with the prices they are charged and if they shopped around before signing with the franchisor to see if this was the best deal.
The wave of the future
As franchising becomes more and more sophisticated, many franchisors are offering a partial or full turnkey package. They understand the benefit of providing their franchisees with every possible advantage and maximizing their chance at success.
With retail franchise concepts, the franchisor will likely 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 a consistent “look and feel” with the ability to control costs.
A necessary ingredient for success
A true turnkey franchise is in a “condition ready for immediate use, occupation, or operation,” according to a strict definition. In most cases, a franchisor will do some but not all of the work to get you up and running. You will still need to take care of a number of start-up tasks yourself.
Whether a business is turnkey or not, remember that there is one element of the equation that a franchisor cannot control or provide – the drive, talent and determination of the franchise owner. The good news? That’s all in your control.