Getting a Handle on Your Franchise's Utility and Equipment Costs

Understanding how utility and equipment costs will affect your overall operating budget shouldn’t be an afterthought. Instead, get a handle on what you can expect to dole out as your business hums along.

Typical costs include:

• Electricity
• Gas
• Water
• Garbage
• Phone
• DSL or other high-speed internet
• Music service
• Video or cable service
• Alarm system
• Camera (surveillance) system

Some of the questions you need to ask include: Will you be paying utilities from separate meters? Or are some utilities paid for by the landlord and then shared and allocated, pro-rata, among several tenants? Does the landlord pay some or all of the utilities? What is the trend in the cost of utilities? Will you have to make upgrades to any of the utilities in the future?

For example, the national sandwich franchise I owned required all franchisees to acquire high-speed toaster ovens which required 220-volt service. Some locations didn’t have enough electrical capacity to add this service to their stores, and they were forced to spend big bucks in order to accommodate this demand. Are you going to have to invest in technology to support your operations? For instance, will you be required to provide WiFi hotspots, flat-screen TVs, high-speed internet T1 lines, or DSL for processing? If that capability is not currently in your store, factor in the cost of providing it.

What about surveillance? If the location you are considering does not have it yet, get it. Also, pay for a high-speed internet connection so you can watch what’s going on in your location, even when you’re not there. Technology will soon be available that will enable you to view the output from surveillance cameras directly and clearly on your 3G equipped cell phone. You’ll want this as soon as it is available.

Equipment

If you are buying an existing location, you need to be very, very careful in evaluating any existing equipment and how it might impact your costs. What is the cost of equipment repairs? Is any of it under warranty? How much is the owner currently spending on repairs?

Remember, you may have to replace equipment not only because it is not working, but because the franchisor demands you replace equipment that is old. Or you may want to replace a piece of equipment that is working okay, but it is hogging too much electricity. Add a yearly amount into your “equipment repair cost” line item that will cover the cost of replacing old or obsolete equipment.

When are you going to have to remodel the location? Most franchisors require that the franchisees update the look of their location periodically. It is critical to understand where in this cycle the location is, and when you will be required to remodel your location, and approximate what the costs of the remodel will be.

Secret #1: Be sure to ask the franchisor what their plans are for requiring an upgrade to the POS system or other technology initiatives and what their cost estimate is. This can often be a $20,000 investment.

Secret #2: List every piece of equipment in the location that would cost more than $500 to replace and assign a best guess as to when you will need to replace that equipment.