What is a turnkey business?
‘Turnkey’ is becoming an increasingly prevalent word in the world of franchising. Many prospective franchisees will notice that franchises are often described as ‘turnkey’ opportunities – but what does that really mean?
What is a turnkey business?
Put simply, the word ‘turnkey’ is used to describe a business opportunity that eliminates much of the stress from the franchisee. The business will carry out and provide everything that is necessary for setting up the business, so that the franchisee can simply ‘turn the key’ in the door and start trading. The business could refurbish, design and set-up the premises, buy equipment and initial stock, and even recruit and train staff.
At its simplest level, “turnkey” businesses require very little work from the business buyer other than enticing customers. Of course, this is an attractive concept for prospective franchisees, particularly those that are new to franchising.
Turnkey Business Examples
With franchising, a turnkey business usually involves a building that is made in accordance with the franchise’s specifications and in an exclusive territory. One franchise that offers turnkey opportunities is the sandwich shop, Subway. If you buy a turnkey outlet, the site will have been decorated, the menu will have been created and there will be marketing schemes in place. Therefore, when opening a Subway franchise, all an individual has to do is pay the franchise fee and any ongoing costs. It isn’t the franchisee’s responsibility to manage major aspects of the business’ development.
Tim Hortons is another example of a franchise that offers a turnkey model. Tim Hortons should set up the business and have a team of staff in place, as well as provide guidance with admin, promotions and national marketing schemes.
However, a disadvantage of turnkey businesses is that they are often unreachable for many entrepreneurs. For instance, in order to become a Tim Hortons franchisee, you need to have $1.5 million in total assets as well as $500,000 in capital. The good thing about choosing one of the Tim Hortons turnkey models is that the brand already has a powerful global presence, so it won’t be difficult to entice customers. This means that, despite the significant cost, you should be able to get a high return on your investment.
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Is a franchise business opportunity the same as a turnkey package?
No. Although some franchises do offer complete turnkey packages, most will expect the franchisee to play a part in the set-up of the new franchise unit. It is expected that the franchisor will offer a training scheme and ongoing operational support, but the majority of franchisees are responsible for everything else, including sourcing and training staff. A turnkey model can only be ascribed to franchises that provide the entire ‘business in a box’ – from conception to launch.
Therefore, most franchisors offer what can be interpreted as a ‘partial turnkey’ opportunity, as they carry out some of the tasks needed to get the business running, but not all of them. This is why you need to scrutinise what each franchise offers to make sure it suits you. You can ask for a breakdown of what the turnkey opportunity offers if the investment cost seems unreasonably high.
Does a turnkey package include literally everything?
Really, a turnkey package should include everything – except possibly hiring staff. Many business opportunities use the term ‘turnkey’ quite loosely, so before choosing which one you want to invest in, ensure you research what is included in detail. A turnkey package should include everything from the business concept to its operation. This is why it is a pricier option. You are paying for the time and resources it took to make the concept a reality so you can turn the key and start making money from it. Watch out for turnkey prices on businesses that can’t actually let you just turn the key.
Advantages of turnkey business opportunities
On the face of it, a turnkey business opportunity seems like a great prospect. Here’s why:
- Less stress – Turnkey businesses take care of all the hard work on your behalf. This can be helpful if you are daunted by the prospect of setting up a new unit.
- No limitations – Non-franchise turnkey businesses can be an appealing alternative to franchises because you can benefit from the support of the established business without being constrained by the guidelines that might be set out in a franchise agreement.
- No ongoing fees – It is also unlikely that you will have to pay ongoing royalty or marketing fees as you would in a franchise.
Disadvantages of a turnkey business opportunity
However, these benefits come with compromises:
- No ongoing support – Although turnkey opportunities provide a high amount of initial support, you will not receive the ongoing support that a franchisee would.
- High prices – It is likely that you will have to pay a premium for the convenience of having the business set up for you. However, this can get out of hand, and you may find you are paying over the odds for specific elements of the business package. Be sure to query the financial aspects of the opportunity before signing up if you feel you are paying too much.
- Limited control – If you walk into a business that’s already running, you’ll have no involvement in the set-up process. This can be beneficial if you’re new to business ownership and cautious about setting up a new business, but you risk missing out on the fun if you’re looking forward to creating your franchise unit from nothing.
How can you make sure you’re not paying above the odds?
There are a few ways to make sure you’re getting the most out of your money:
- Research, research, research. Take the time to look in detail not only at the turnkey opportunity you are interested in, but also other similar opportunities advertised by other organisations. By comparing packages, you will be able to get a good idea of where your preferred choice stands.
- Meet with the business owners. Request a breakdown of the costs involved in advance, as this will allow you to check that none of the individual components of the package have a large mark-up. Having read through this breakdown and discussed the opportunity with the business owners, you should have a clear idea of whether the convenience of the package is worth the money you will have to pay.
- Speak to existing business owners. They will be unbiased and able to tell you if they feel satisfied with the experience they have had with the company. Ask whether the process went smoothly and if they have any advice.
- Consult a specialist solicitor. Once you have the business agreement in your hand, ask a specialist to review it for you so that there are no nasty surprises further down the line.
- Check and check again. Once you sign the agreement, there’s no going back, so make sure you are happy with your decision – and that you are confident you will still be happy in years to come. Be extra careful if your chosen turnkey opportunity is also a franchise opportunity. If this is the case, you may be hit with a double whammy – extra costs to start up the business on your behalf and ongoing royalty fees. Make sure that the support is worth the money.
So, which is best – a turnkey package or the franchise model?
This depends on what you want from your investment. Both opportunities can lead to profitability and business growth. Franchises lack the large fee associated with turnkey models but impose restrictions on the franchisee, limiting the amount of control and creativity they can have. On the other hand, turnkey businesses have a higher cost and no ongoing support but are more convenient. In general, franchises are considered a safer investment than turnkey models, and the franchisee can consult the franchisor about any concerns or issues.
To conclude, the two different models suit different types of entrepreneurs. If you’re a first-time business owner, you might take comfort in the fact that a turnkey model does all the hard work for you, but you should remember that franchise models provide ongoing support, guidance and training, which is often more helpful in the long run. If you’re more interested in expansion, turnkey business opportunities could allow you to invest in multiple opportunities as a result of their low operational costs. Of course, multi-unit franchising is available to franchisees, but this often comes at a greater cost.
As turnkey business opportunities become more popular, both inside and outside of the franchising world, potential investors will have to be increasingly judicious. In a world where entrepreneurs want to get businesses started as soon as possible and are willing to pay for the privilege, it looks like turnkey opportunities are here to stay.
Becky Martin, Point Franchise ©
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