Startup costs for Schwab franchises revealed

Although Charles Schwab has been readying its branch-franchising program for some time, few specifics have been released. But documents obtained by InvestmentNews reveal the estimated startup costs, along with Schwab's expected take.

New details have emerged about the branch-franchising program being developed by Charles Schwab & Co. Inc.
The company so far has described only general outlines of the program. Franchise documents filed with state regulators and obtained by InvestmentNews, however, reveal further details about how much potential franchisees would pay — and how much money they might make.
Total start-up costs are estimated at $46,650 to $109,910, including the $25,000 to $50,000 franchise fee, according to Schwab’s disclosure document.
Franchise fees would increase with the number of existing Schwab clients a new franchisee was given.
In addition to taking a share of revenue, Schwab is charging franchisees a number of other fees, including office rent, estimated at $1,250 to $6,250 per month, along with a monthly facilities fee of $3,000 to $6,000 for leasehold improvements made by Schwab and amortized over the first five years of operation. The discount brokerage will also charge a technology fee of $900 to $1,500 per month, along with the cost of hardware upgrades when needed. The brokerage will also assess a client-servicing fee of $2 per month.
In addition, Schwab franchisees will have to pay for employee salaries.
The company will calculate branch revenues based on the assets at the location, multiplied by an average yield-on-assets figure from all of Schwab’s franchised branches. In 2010, the average asset yield for its company-owned stores was 42 basis points, Schwab disclosed.
To help get new branches off the ground, Schwab is adjusting upward the average revenue amount by 100% in the first year of operation, 50% the second year and 10% in year three.
But in the fourth year, Schwab will take 25% of franchisees’ revenue, and 50% from then on.
Franchised locations generally will be located outside of major urban areas and are expected to reach $100 million or more in assets.
Some observers have questioned whether the deal makes sense for franchisees, especially with Schwab taking half of the top line. “I can see it work if [a franchise office] gets up to $300 million or $400 million” in assets, said Tim Hatton, president of Hatton Consulting Inc., a Schwab-affiliated advisory firm that manages about $180 million.
But at $100 million in assets, after expenses, he said there might not be enough to attract the quality of person Schwab needs.
Schwab sees it differently. “We believe that by year five or six, an independent branch leader should be able to grow their business to a point that the economics are attractive,” Schwab spokesman Michael Cianfrocca wrote in an e-mail.
Franchisees will be able to take advantage of the Schwab brand, the firm’s infrastructure, and also receive help with national and local marketing, he wrote.