diff --git a/plugins/scaffolder-backend/src/scaffolder/prepare/file.test.ts b/plugins/scaffolder-backend/src/scaffolder/prepare/file.test.ts
new file mode 100644
index 0000000000..6ab0aa3fb0
--- /dev/null
+++ b/plugins/scaffolder-backend/src/scaffolder/prepare/file.test.ts
@@ -0,0 +1,50 @@
+/*
+ * Copyright 2020 Spotify AB
+ *
+ * Licensed under the Apache License, Version 2.0 (the "License");
+ * you may not use this file except in compliance with the License.
+ * You may obtain a copy of the License at
+ *
+ *     http://www.apache.org/licenses/LICENSE-2.0
+ *
+ * Unless required by applicable law or agreed to in writing, software
+ * distributed under the License is distributed on an "AS IS" BASIS,
+ * WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+ * See the License for the specific language governing permissions and
+ * limitations under the License.
+ */
+
+import fs from 'fs-extra';
+import YAML from 'yaml';
+import { FilePreparer } from './file';
+import path from 'path';
+import {
+  TemplateEntityV1alpha1,
+  LOCATION_ANNOTATION,
+} from '@backstage/catalog-model';
+
+describe('File preparer', () => {
+  it('resolves relative path from the template', async () => {
+    const locationForTemplateYaml = path.resolve(
+      __dirname,
+      '../../..',
+      'test/test-simple-template/template.yaml',
+    );
+
+    const [parsedDocument] = YAML.parseAllDocuments(
+      await fs.readFile(locationForTemplateYaml, 'utf-8'),
+    );
+
+    const template: TemplateEntityV1alpha1 = parsedDocument.toJSON();
+
+    template.metadata.annotations = {
+      [LOCATION_ANNOTATION]: `file:${locationForTemplateYaml}`,
+    };
+
+    const filePreparer = new FilePreparer();
+    const resultDir = await filePreparer.prepare(template);
+
+    expect(fs.existsSync(`${resultDir}/expected_file.ts`)).toBe(true);
+    expect(fs.existsSync(`${resultDir}/template.yaml`)).toBe(false);
+  });
+});
diff --git a/plugins/scaffolder-backend/src/scaffolder/prepare/file.ts b/plugins/scaffolder-backend/src/scaffolder/prepare/file.ts
index d7d21baa29..184e1a6b1f 100644
--- a/plugins/scaffolder-backend/src/scaffolder/prepare/file.ts
+++ b/plugins/scaffolder-backend/src/scaffolder/prepare/file.ts
@@ -13,8 +13,9 @@
  * See the License for the specific language governing permissions and
  * limitations under the License.
  */
-// import fs from 'fs-extra';
-import fs from 'fs';
+import fs from 'fs-extra';
+import path from 'path';
+import os from 'os';
 import {
   TemplateEntityV1alpha1,
   LOCATION_ANNOTATION,
@@ -26,14 +27,16 @@ export class FilePreparer implements PreparerBase {
   async prepare(template: TemplateEntityV1alpha1): Promise<string> {
     const location = template?.metadata?.annotations?.[LOCATION_ANNOTATION];
 
-    const [locationType, actualLocation] = (location ?? '').split(/:(.+)/);
+    const [locationType, templateEntityLocation] = (location ?? '').split(
+      /:(.+)/,
+    );
     if (locationType !== 'file') {
       throw new InputError(
         `Wrong location type: ${locationType}, should be 'file'`,
       );
     }
 
-    if (!actualLocation) {
+    if (!templateEntityLocation) {
       throw new InputError(
         `Couldn't parse location for template: ${template.metadata.name}`,
       );
@@ -41,9 +44,18 @@ export class FilePreparer implements PreparerBase {
 
     const templateId = template.metadata.name;
 
-    const tempDir = await fs.promises.mkdtemp(templateId);
+    const tempDir = await fs.promises.mkdtemp(
+      path.join(os.tmpdir(), templateId),
+    );
+
+    const parentDirectory = path.dirname(templateEntityLocation);
+
+    await fs.copy(parentDirectory, tempDir, {
+      filter: src => src !== templateEntityLocation,
+    });
+
+    // TODO(blam): Need to use the `spec.path` with path.resolve to ensure that the test case for test-nested-templates will work
 
-    // await fs.copy(actualLocation, tempDir);
     return tempDir;
   }
 }
diff --git a/plugins/scaffolder-backend/src/scaffolder/prepare/preparers.test.ts b/plugins/scaffolder-backend/src/scaffolder/prepare/preparers.test.ts
new file mode 100644
index 0000000000..96e6b7d5b9
--- /dev/null
+++ b/plugins/scaffolder-backend/src/scaffolder/prepare/preparers.test.ts
@@ -0,0 +1,52 @@
+/*
+ * Copyright 2020 Spotify AB
+ *
+ * Licensed under the Apache License, Version 2.0 (the "License");
+ * you may not use this file except in compliance with the License.
+ * You may obtain a copy of the License at
+ *
+ *     http://www.apache.org/licenses/LICENSE-2.0
+ *
+ * Unless required by applicable law or agreed to in writing, software
+ * distributed under the License is distributed on an "AS IS" BASIS,
+ * WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+ * See the License for the specific language governing permissions and
+ * limitations under the License.
+ */
+import { Preparers } from '.';
+import { TemplateEntityV1alpha1 } from '@backstage/catalog-model';
+
+describe('Preparers', () => {
+  it('should throw an error when the preparer for the source location is not registered', () => {
+    const preparers = new Preparers();
+    const mockTemplate: TemplateEntityV1alpha1 = {
+      apiVersion: 'backstage.io/v1alpha1',
+      kind: 'Template',
+      metadata: {
+        annotations: {
+          'backstage.io/managed-by-location':
+            'file:/Users/blam/dev/spotify/backstage/plugins/scaffolder-backend/sample-templates/react-ssr-template/template.yaml',
+        },
+        name: 'react-ssr-template',
+        title: 'React SSR Template',
+        description:
+          'Next.js application skeleton for creating isomorphic web applications.',
+        uid: '7357f4c5-aa58-4a1e-9670-18931eef771f',
+        etag: 'YWUxZWQyY2EtZDkxMC00MDM0LWI0ODAtMDgwMWY0YzdlMWIw',
+        generation: 1,
+      },
+      spec: {
+        type: 'cookiecutter',
+        path: '.',
+      },
+    };
+
+    expect(() => preparers.get(mockTemplate)).toThrow(
+      expect.objectContaining({
+        message: 'No preparer registered for type file',
+      }),
+    );
+  });
+  it('should return the correct preparer when the source matches');
+  it('should throw an error if the srouce is not available');
+});
diff --git a/plugins/scaffolder-backend/test/test-nested-template/template-1/expected_file.ts b/plugins/scaffolder-backend/test/test-nested-template/template-1/expected_file.ts
new file mode 100644
index 0000000000..19b0312029
--- /dev/null
+++ b/plugins/scaffolder-backend/test/test-nested-template/template-1/expected_file.ts
@@ -0,0 +1,16 @@
+/*
+ * Copyright 2020 Spotify AB
+ *
+ * Licensed under the Apache License, Version 2.0 (the "License");
+ * you may not use this file except in compliance with the License.
+ * You may obtain a copy of the License at
+ *
+ *     http://www.apache.org/licenses/LICENSE-2.0
+ *
+ * Unless required by applicable law or agreed to in writing, software
+ * distributed under the License is distributed on an "AS IS" BASIS,
+ * WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+ * See the License for the specific language governing permissions and
+ * limitations under the License.
+ */
+console.warn('here!');
diff --git a/plugins/scaffolder-backend/test/test-nested-template/template.yaml b/plugins/scaffolder-backend/test/test-nested-template/template.yaml
new file mode 100644
index 0000000000..713094defe
--- /dev/null
+++ b/plugins/scaffolder-backend/test/test-nested-template/template.yaml
@@ -0,0 +1,9 @@
+apiVersion: backstage.io/v1alpha1
+kind: Template
+metadata:
+  name: react-ssr-template
+  title: React SSR Template
+  description: Next.js application skeleton for creating isomorphic web applications.
+spec:
+  type: cookiecutter
+  path: ./template-1
diff --git a/plugins/scaffolder-backend/test/test-simple-template/expected_file.ts b/plugins/scaffolder-backend/test/test-simple-template/expected_file.ts
new file mode 100644
index 0000000000..19b0312029
--- /dev/null
+++ b/plugins/scaffolder-backend/test/test-simple-template/expected_file.ts
@@ -0,0 +1,16 @@
+/*
+ * Copyright 2020 Spotify AB
+ *
+ * Licensed under the Apache License, Version 2.0 (the "License");
+ * you may not use this file except in compliance with the License.
+ * You may obtain a copy of the License at
+ *
+ *     http://www.apache.org/licenses/LICENSE-2.0
+ *
+ * Unless required by applicable law or agreed to in writing, software
+ * distributed under the License is distributed on an "AS IS" BASIS,
+ * WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+ * See the License for the specific language governing permissions and
+ * limitations under the License.
+ */
+console.warn('here!');
diff --git a/plugins/scaffolder-backend/test/test-simple-template/template.yaml b/plugins/scaffolder-backend/test/test-simple-template/template.yaml
new file mode 100644
index 0000000000..7ee2132d59
--- /dev/null
+++ b/plugins/scaffolder-backend/test/test-simple-template/template.yaml
@@ -0,0 +1,8 @@
+apiVersion: backstage.io/v1alpha1
+kind: Template
+metadata:
+  name: react-ssr-template
+  title: React SSR Template
+  description: Next.js application skeleton for creating isomorphic web applications.
+spec:
+  type: cookiecutter