Turn Key to Start?
Q: I'm looking into the purchase of a franchise that offers a "turnkey" package. What does this term mean? What do I get in such a package? Also, is there anything I need to do to make sure I'm protected properly in relation to this program from the franchisor?
A: This is a very timely question, because we are seeing more and more franchise companies offering such packages to new franchisees. The answer to your first question is simple.
The term "turnkey" refers to a package that is so complete in providing everything you need to start the franchised unit, all you have to do is "turn the key" and open the door to be in business. In a true turnkey package, the franchisor would include everything from finding the site, signing the lease, buying everything needed to start the business, completely building out the unit, hiring and training the staff, etc.
Most of the franchise companies that offer packages like this are really offering a partial turnkey program. They probably do many of the things mentioned above, but not all. For example, it is very rare for the franchisor (even given a "turnkey" package) to hire your staff for you.
A turnkey package program can be a huge advantage to a new franchisee because of all the work and aggravation it can save you. It may also be a huge rip off, and you need to do some research to find out whether that's the case.
The challenge with these packages lies in the markup, if any, the franchisor is attaching to the package components. You should expect to get a great deal on the components needed for the business since you're taking advantage of the buying power of the chain. You should also expect to pay a fair amount for the labor involved in having someone else do all this work for you. What you shouldn't expect to pay is a large markup above the actual costs to put this package together for you.
Keep in mind that you're also paying a large upfront franchise fee, and substantial ongoing royalty payments, to this franchisor to help you get into and effectively run this business. Those are the accepted costs of a franchise business. A large additional profit on the components necessary to get your unit open for operation is not.
The quick and easy way to find out if the turnkey package you're looking at is a great deal or highly inflated is to ask existing franchisees. When you call them to ask your questions about the business, make sure to cover this topic thoroughly.
Ask them if they are happy with the value of what they got. Did they shop around to make sure they were getting a good deal? Did the process go as smoothly as the franchise salesperson said it would?
If you aren't completely sure based on these calls, ask the franchisor if they provide a complete cost breakdown, by individual component on at least the larger cost items, to the franchisee who orders the turnkey package. Ask if the labor costs to provide this service are a separate line item or whether the labor is built into the cost of the components (and, if so, what the markup percentage is to cover labor).
You can always shop around yourself, but my experience is you won't have to. If the franchisor is making a ton of profit off of turnkey packages, every existing franchisee will know they were taken advantage of and won't be reluctant to tell you so.
As always, take the time to thoroughly investigate any franchise opportunity to make sure the track record is strong and dependable and call existing franchisees of the system to validate the information you have received.
Jeff Elgin is the "Buying a Franchise" coach at Entrepreneur.com and has almost 20 years of experience in franchising, both as a franchisee and a senior franchise company executive. He is currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best matches their needs.