What is a Turnkey Operation?

A Turnkey operation is defined as a product or service concept that is complete, installed and ready to use upon delivery or installation. The product or service is then leased or sold to an individual to run as his/her own venture. Manufacturers of industrial plants like electric generating plants, cement plants, oil refineries, and many others usually make their sales on this basis. In the computer industry and the Web, it refers to a system or software package that has been built, installed or supplied by the manufacturer complete and ready to operate. It is a system that can be easily set up and operated “right out of the box.”

In transactions like these, the seller agrees to put up the plant or business, with his own financing and does not collect anything from the buyer. He (the seller) is guaranteed to be paid by the buyer upon delivery of the fully operational installation. This guarantee may come in the form of a Letter of Credit or bank guarantee opened by the buyer in favor of the seller or the buyer keeps his money on escrow with the condition of the turnkey agreement.

Applied to franchises, turnkey operations means just the same. If you buy a franchise under this agreement, it means that you will pay the seller upon the completion of the project.

Please note however that turnkey agreements are very complicated because of uncertainties on both sides. The seller has to protect himself to be able to collect upon delivery while the buyer has to make sure that he is not buying a “lemon”. This gets the financial and the legal institutions involved because everyone wants to protect him or herself.

In a turnkey operation, the seller assures the buyer that he is capable of building a project with his own financing and technical capabilities. Companies normally offer big projects on Turnkey operations. Offering turnkey agreements give the seller an edge over competing companies who does not have financing support from banks and those who may need staggered payment terms like down payments and so much percent after so much percentage of completion of the project.

The same thing applies for turnkey operations in buying an existing business. You pay the seller after all your conditions are fully satisfied.

Original Publication Date: May 30, 2002

Recommended Books on Turnkey Operation:

Nach Maravilla

Nach Maravilla is the President and CEO of PowerHomeBiz.com LLC. He has over thirty years experience in sales and marketing of various products, which covered as he jokingly describes, “from toothpicks to airplanes” He also had extensive experience in International trading and he always excelled in special promotional ideas for retail outlets.