How Much Does Opening a Franchise Cost?
So, you’ve decided to take an exciting leap into entrepreneurship by opting for a franchise. Although this is a smart move, you are watching your budget.
Building a solid financial foundation from the get-go as a franchise owner is important, and that’s what makes your business successful.
Guess you can only manage the startup by carefully planning the costs of premises, inventory, and numerous other things. Then there’s the franchise fees, where you’ll be paying a % of your revenue back to the franchisor.
So, let’s break down these costs one by one to help you begin with the end in mind and win!
1. The Ball-Park Figure
If you can think of a business then there is usually a franchise business. Franchise businesses range from fast-food restaurants to restoration and cleaning. This is why the costs can vary greatly. A majority of franchise startup costs lie between $100,000 to $300,000, but they can be as little as $10,000 or go up to a few million (ADP). It all boils down to the location, industry, and nature of the franchise. Typically, home-based franchises or mobile franchises cost less as compared to restaurants or hotels, but this can vary.2. The Real Deal: Breakdown of Costs
Let’s discover what you need to evaluate your franchise’s cost!First Things First: The Franchise Disclosure Document (FDD)
The FDD is a document that franchisors are generally required to provide to prospective franchisees at least 14 calendar days before signing the agreement. This document contains important details of the franchise along with an estimate of the capital and startup costs. Take a look at the costs mentioned and then check out the list I’ve compiled here.Legal Fees
Although hiring a franchise attorney is not mandatory, it is highly recommended. Franchise attorneys know the ins and outs of the trade and can be an invaluable asset in acquiring a franchise. They can help you go over the Franchise Disclosure Document (FDD) and warn you of any red flags or issues. There is no set cost for hiring legal help but it usually ranges from $1500 to $5000. Yes, this sounds like an additional strain on your limited cash pool, but trust me, you want to make sure you are comfortable with the agreement.Accountants
Filing taxes on time, and having an impeccable financial record are very important for new franchisees, and hiring an accountant can be game-changing. Accountants can help catch any financial mistakes and make sure you are current with all the changes in the tax code.Building Costs
The parent company usually has strict rules on the particulars to showcase its brand in the right light. You need to pay for the location, which has to be appropriate for a brand. This could mean needing to pay for an upscale area or a large enough space to set up, display, and design elements. On top of that, you need to pay for the existing structure and its renovation or to design and build the place from the ground up. Calculating the costs of acquiring the building materials and furniture is a crucial step. A franchisor can help you calculate an estimate of the cost. The total expenses can vary based on your state or city, especially if the exact specifications are hard to find, so make sure you know where to source them and how much it’ll cost!Working Capital
These are the finances needed for a business to run for the first year. This number should be mentioned in Item 7 of the FDD. A new franchise should have enough capital to run for at least 3 months without any revenue but it is better to have funds for a year. This way, if there are any hiccups, mistakes, or miscalculations in the early months, you have the capital to cover them.Franchising Fees
Requirements Before Opening the Franchise
These are mainly based on the parent company. The key metrics that a franchisor sees in a potential franchisee are their net worth and liquidity. Owning a franchise can be capital-intensive, so having high liquidity is vital.Payables
Franchising fees usually range between $20,000 to $50,000 depending on the industry. Some mobile businesses can cost much less, whereas bigger brands can ask for a considerably higher amount. The Franchising Fee covers franchise startup support, and may also include site selection, as well as staff training, depending on the brand. Since you’re piggybacking off the brand’s name, you can be sure they want to ensure you are a good fit for their brand. Plus, they’re giving you automatic publicity and trust from their existing customers. The bigger the brand, the more exposure you may be able to benefit from.Perks From Being a Part of a Parent Brand
Here are a few:- Lower risk
- Support and training
- Easier management
- Marketing and brand recognition
- Capital and support from the parent company
- Built-in loyal customer base
Specific Supplies
Each franchise has different requirements for the supplies needed to run the business. Restaurants may need kitchen appliances, carpets, and mats whereas a gym may need other equipment like treadmills, squat racks, or power cages. At most times, franchisors will request the same colors, dimensions, etc as they want to remain consistent for all their locations to help with a stronger brand identity. You can ask your franchisor for an estimate on the supply costs, or go to businesses in the same niche for an idea. Do your research first, especially if there aren’t any other franchises of the brand in the area because getting that specific equipment in the right shades of crimson and Tyrian purple can cost more than you think!Inventory
In many cases, inventory can be one of the largest capital costs for setting up a franchise, especially if your franchise is a retail store. Oftentimes, the parent company can give subsidiaries and loans to acquire inventory, but this is not always the case.Advertisements
Franchises may have to pay fees of between 1 to 4 percent, or a fixed amount, to the franchisor for advertisements. This fee covers the franchisor to drive more traffic toward the franchise and better advertise it in the community. Sometimes, you’ll need to advertise the opening of your franchise in your area. Sure, College Hunks is famous enough that anyone who sees your little shop is likely to trust it. However, you need to make sure they see the shop and know it’s there in the first place!Royalty Fees
The parent company of a franchise takes a percentage of the revenue as its share for letting the franchise use its branding and name, along with initial and ongoing support. According to the Franchise Help, the royalty has to be given to the owner on a decided pattern, be it monthly or yearly. The royalty percentage usually lies between 5 and 19 percent. The benefit of a royalty fee over upfront payment is that the franchise only has to pay the parent company if it makes money. This makes it a lot safer and lighter for your pocket at the time of starting the franchise.3. How to Finance a Franchise
Work With a Franchisor
This will vary by brand, but some Franchisors will offer in-house financing or even discounts for veterans.SBA Loans
You can apply for an SBA loan which is a government-backed loan with additional benefits.ROBS
ROBS, which stands for Roll Over for Business Startup has been a very popular way to fund your business utilizing a retirement account from a previous employer or even a Traditional IRA.Funding Companies
Funding Companies will be able to review your entire financial picture to help you decide on the best option or even options.Insider Tip: Ask the Experts
Although a blog post can give you an insight into what you need to watch out for, you do need to ask someone with experience for the nitty-gritty details. Get a franchising guide, which can act as an extremely valuable asset when you’re entering this field. They can give you an expert opinion specific to your preferred parent company, location, budget, requirements, and challenges.
Remember: Avoid spending half your budget on learning how to budget! Watch out for a guide’s hidden fees or agendas to push you toward a specific brand. Hit GG up (GG The Franchise Guide) for a FREE consultation to get more insight!
The Bottom Line
Franchising is not for everyone but it is very important to have a true understanding of the business model and all costs involved to be able to create your own projections and proformas. In this blog post, you’ve seen the requirements. Now is the time to figure out what budget and brands you are comfortable with before signing on the dotted line.Bonus Section: A Case Study
Burger King is a privately owned restaurant franchise. It has 12,000 locations in 75 countries and is listed in the top 1000 largest corporations in the US. Let’s look at a breakdown of their fees according to Franchise Help for a real-world idea of the costs. Burger King has a franchising fee of about $50,000 and requires a total investment of between $316,100 and $2,660,600. The set royalty fee is an additional 4.5 percent. To become a franchise owner for Burger King, you must have a net worth of 1.5 million with at least 500,000 in liquid cash. Below are a few benefits of the franchise:- Burger King hosts a grand opening event for the franchise that leads to great exposure.
- They offer various meetings and evaluations to help the owner run the business
- They have a toll-free phone number to help franchise owners when they face problems.
- A Burger King franchise agreement is a 20-year contract, but it can easily be renewed. This means you get reliable, long-term support.