How much does a franchise cost? Of course, the cost of obtaining and starting a franchise depends on several variables. For example, the type of industry, size, and location are some of the differentiating factors. However, there are some basics that you might want to keep in mind if you are considering becoming a franchisee.
First of all, you will usually have to pay a franchise fee, which on average ranges from $20,000 to $30,000. However, the fee could be less than $10,000 for businesses like mobile and home-based businesses, or in some cases could cost $100,000 or more. Some examples of these more expensive franchises include building maintenance businesses and some types of athletic training facilities.
Since you get the benefit of participating in an already recognizable business name, and usually the franchisor’s ongoing support as well, franchisors typically stipulate that a potential franchisee meets other financial requirements. A predetermined amount of readily available funds that are not borrowed is usually a necessity, as is a certain net worth. To pay for ongoing expenses that aren’t covered by income, you’ll also need a guaranteed amount of working capital. Depending on the type of business, it is important that the working capital cover a certain period of time, ranging from a few months to possibly two or three years, until the business is in full swing. The franchisor normally provides an estimate of the amount needed.
In addition to the franchise fee, other upfront costs could include professional fees such as legal and accounting services, insurance, and operating licenses. Employee training, inventory, and equipment are also often part of the start-up. Also plan for rent and possible leasehold improvements, and other costs associated with setting up a retail store, including purchasing fixtures, signs, and landscaping. You may also incur start-up and promotional expenses to get the business off the ground.
Keep in mind that many times a higher initial investment does not necessarily mean a higher return. Franchises can often be started with a total initial investment of less than $200,000, and sometimes even less than $50,000. Some home-based businesses, such as handyman franchises and marketing franchises, provide a decent return with little cash up front.
Ongoing, you’ll need to be prepared to continually pay royalties to your franchisor, possibly 4 to 6 percent of your revenue. In addition, insurance (liability and health), inventory, and equipment maintenance would be ongoing expenses. Of course, there will be salaries and benefits for employees. Also, you may have to pay into a national advertising fund.
Before making a franchise decision, it is important to obtain a copy of the Uniform Franchise Offering Circular (UFOC), also known as a disclosure document, from the franchisor. Initial fees are described in this circular. The document must describe the initial fee, which may not be refundable, as well as any other initial costs. If there are items that you think might be start-up costs that are not mentioned in the disclosure, be sure to ask about them.
All things considered, you want to be sure that your financial situation will cover the expenses for you and your family during the time it takes to start the business. This can take several months or a little longer than that. Consider your operating expenses, as well as personal expenses for the first year or two in business. To give yourself the best chance of success with a franchise, it is recommended that you contact a franchise consultant to discuss your goals and finances.