How much does a franchise cost? Of course the cost of purchasing a franchise and becoming a franchisee depends on several variables. For instance, the type of industry, the specific product or service being sold, the physical size and location of the franchise unit and a number of other factors.
However, there are some basics that you can keep in mind if you are contemplating purchasing a franchise and becoming a franchisee.
First of all, you will usually have to pay a franchise fee, which averages somewhere between $20,000 and $30,000. However, in some instances, the fee can be less than $10,000 for certain mobile and home-based businesses. On the other hand, franchises involving expensive facilities or equipment, like building maintenance businesses and some types of athletic training facilities can charge in excess of $100,000.
Since you are gaining the advantage of operating under an already recognizable business name and ongoing support from the franchiser, they ordinarily stipulate that a potential franchisee meet other financial requirements.
A predetermined amount of readily available funds that are not borrowed is usually a requirement in addition to a certain minimum net worth. In order to pay for ongoing expenses that are not covered by revenue while you are in the process of “ramping-up” your business you will also need a guaranteed amount of working capital.
Depending on the type of business, it is important that the working capital cover a particular length of time, ranging from a few months to possibly two to three years until the business is in full swing. The franchisor typically provides an estimate of the amount of working capital needed.
In addition to the franchise fee, other up front costs could include professional fees such as legal and accounting services, insurance, and operating licenses. Employee training and the purchase of inventory and equipment are usually part of the startup as well.
You should also plan on rent, possible leasehold improvements, and other costs involved in setting up a retail location including the purchase of fixtures, signs, and landscaping. You may also incur grand opening and initial promotional expense to get the business going.
Keep in mind that many times a higher initial investment does not necessarily mean a higher return. Some home-based businesses such as handyman franchises and marketing franchises provide a decent return with little up front cash.
On an ongoing basis you can expect to pay royalties to your franchisor, which generally run in the area of 4 to 6 percent of your revenue. Inventory, liability and health insurance, and equipment maintenance and replacement are additional expenses that will continue over time, along with employee salaries and benefits. It’s also likely you’ll be required to pay into a national advertising fund.
Before making a decision about purchasing a franchise, it is important to obtain from the franchisor a copy of the Uniform Franchise Offering Circular (UFOC), also known as the disclosure document. The up front fees are outlined in this circular. The document should describe the initial fee, which may be non-refundable, as well as the other startup costs. If there are any items that you believe might be startup costs that are not mentioned in the disclosure, be certain to ask about them.
In the final analysis, you want to make certain that your financial situation will cover expenses for both your business and your family during the time it takes to get the business up and running. This may take as few as two to three months or considerably longer.
Let me leave you with one final tip. In order to have the best chance of succeeding with a franchise, I strongly recommended that you contact a franchise consultant to discuss your goals and finances.
About the Author
FranchiseRight is an organization of investors and franchise professionals committed to setting the standard for franchise development and operations worldwide. We provide entrepreneurs with investment capital as well as the legal and practical information needed to successfully expand their business through franchising and properly prepare for a highly profitable exit strategy.