How Much Does a Franchise Cost?
So, you’ve been thinking about buying a franchise? You’re not alone. Buying a franchise can be an attractive option for many entrepreneurs. It provides the opportunity to start and grow a business with much less initial investment than starting from scratch and an opportunity for you to invest in an already successful company.
But how much does it cost to buy a franchise?
This is the question that most people ask themselves when considering their options. In this article, we will break down all of the potential cost factors involved in starting a franchise business.
Consider Your Budget
The costs involved when starting a franchise business vary widely depending on the type of franchise. There are many different types to choose from, including retail stores, fast-food franchises, and service-based franchises concerning things that can be done at the client’s home, such as cleaning services, while others require commercial space to operate. The first consideration is your budget.
The initial investment can range from a few thousand to over one million dollars to start a franchise business. The cost of buying into an existing franchisor depends on many factors, including how established they are and what type it is, and on your location. Some areas have more demand than others for certain types of services, which will drive up prices in that area due to competition among other franchises looking at opening there, too.
If you want your own commercial space, it could easily run into six figures and up, depending on how much square footage is needed to provide adequate customer parking spaces or other amenities, like free Wi-Fi access.
Example Franchise Fees
As an example, a fast-food franchise such as Burger King requires a $50,000 franchise fee, but the total investment can be between $316,100 and $2,660,600. The initial investment, including start-up costs, for a home improvement franchise can often be between $94,000 and $129,000. The initial investment for a Kitchen Tune-Up franchise is $72,000, although this investment amount covers a number of additional initial benefits as well as the franchise fee. Our Initial Investment page contains more details about this package.
Typical Costs to Expect When Investing in a Franchise
One mistake often made by potential new franchisees is that they just look at the franchise fee and don’t consider total costs. You should be able to get an estimate from the franchisor, and you can contact other franchisees to speak to them about their overall expenses for additional clarification. Certain costs, such as the initial investment in the franchise fee, are set in stone. But depending on the franchise you are buying, there are variables. For instance, you might run a home-based business, so you don’t need to factor in the costs of renting or purchasing premises.
Once you have a big picture view of all the costs involved, you can determine if you have enough capital to pursue your dream. You might also consider looking into financing or loans.
A franchise fee (also known as an initial franchise fee) is a licensing or royalty charge for the right to use an established name, trademark, logo, and other things that are related to the franchisor’s business. This fee is typically paid by the franchisee for them to set up their own store and brand under a particular company. Franchise fees are usually a one-time fee paid when you sign your franchise agreement. The amount of money varies depending on a number of factors, including the size and type of your business and how many locations you own, among other things.
While state-level definitions of the term “franchise” vary, all franchising in the United States is regulated by Federal Trade Commission rules. The FTC definition consists of these three requirements:
The franchisor licenses its trademarks, service marks, trade name, logo, or other proprietary marks to the franchisee.
The franchisor has “significant operating control” or “significant operating assistance” over the franchisee’s business.
The franchisee makes a payment to the franchisor of at least $500 (annually adjusted) either before or within six months of opening the business.
As stated by the FTC, anything above $500 for the franchise fee meets the requirements to be considered a franchise. However, franchise fees can range from $10,000 to $100,000 or more.
The FTC Rule does not require that a franchisee receive training from the franchisor. However, many franchises offer in-person and online classes to help new business owners get up on their feet quickly and with minimal risk of failure or loss for both parties involved at no extra costs.
Once the franchisee is operating, they must pay a royalty fee to the franchisor, usually on a monthly basis. The royalty fee payment is used to help maintain the brand, provide support to franchisees in need of assistance with their business, and for other aspects that help keep things running smoothly. Royalty fees are based on a percentage of revenue (typically 4-12%) or set at a fixed flat rate.
Rent and Utilities
If you aren’t running a home-based business, you’ll need to consider the costs of renting commercial premises. As well as the obvious rental and utility bill payments, there are other hidden start-up expenses, such as furniture and fittings, signage, contractor fees, real estate agent fees, and insurance, to name a few.
While your business is getting established, it will need working capital to survive. It will provide cash flow to pay employees, suppliers and buy inventory. The required working capital size will depend on how quickly your business is expected to become profitable.
Payroll and Staff Training
This is another significant cost you’ll incur when buying a franchise. More employees mean higher payroll costs. The franchisor can give you a good idea of how many employees you’ll need, as well as some general insights on the costs associated with being their employer.
Accounting and Legal Costs
If you are serious about investing in a franchise, you should seek advice from a qualified franchise attorney beforehand.
Legal fees are generally only a small amount of the costs involved when starting a franchise business. If you’re prepared to spend thousands of dollars on a franchise, then you might want to commit a relatively small sum of your money to legal advice. A franchise attorney can help navigate important legal documents such as the franchise agreement and the Franchise Disclosure Document (FDD).
Often your franchisor will provide you with software to help you keep track of your accounts. However, a qualified accountant can save your time, money, and headaches in the long term. It is best to hire an accountant as soon as possible so they can set up your books and record-keeping correctly from the offset.
Financing and Loans
If you need extra capital to fund your initial investment like many new franchisees, you might need to obtain a loan to cover your start-up costs. There are many options to help finance your franchise, for example, using a 401k/IRA Business Loan or Small Business Administration (SBA) financing. There are also several franchise funding companies that offer loans.
Take into account the reputation of the franchise opportunity you are interested in can influence your chances of securing a commercial loan. Trusted and well-known franchise brands are more likely to get loan approval.
While this does mean that you get to finance your dream business, you will need to add monthly loan payments to your ongoing expenses. Still, once all the payments have been met and the franchise is profitable, you’ll be able to reap all the benefits.
Although the initial investment and ongoing costs of a franchise may seem expensive, having your own business can be a costly endeavor, too. One of the advantages to choosing a franchise business over a new, independent company is that you enter knowing what to expect with startup costs, long-term costs, and estimated revenue. This takes much of the guesswork out of the equation and can help you make a more informed decision about your future business endeavors.
In addition, franchises offer training programs to their franchisees that teach them how best to operate within specific business models in order for both parties involved to succeed financially over time without having any major setbacks along the way.