The Cost Of Opening A Franchise

In order to earn money and success, you need to risk and invest.

Once you have already thought through and decided that franchising is your way to go, it is time to start thinking about which industry segment you would like to work with and which amount of money is required for each one. After putting all the expenses on paper, you will see that the amount of money that you are able to invest may dictate the type of franchise you can open.  Every franchise has different financial requirements, so the starting investments can vary a lot. Usually, you will be required to pay a franchise fee, all build-out expenses for your location (equipment, fixtures, furniture), contractor expenses, professional expenses, and inventory.

Franchisers do not contribute to any of these expenses. Other than having enough money to start the business, you also have to be financially secure enough to stay in the business until your business does not start supporting itself.

Costs of opening go anywhere from $10,000 to $5 million, while most of the franchises run between $50,000 and $200,000 to get in the business. With knowing how much money you can invest, you can start thinking realistically about whether your franchise is going to be five million dollar hotel or home-based mobile business with you being the only employee.

If you are looking to start small, best options are mobile concepts or home-based franchises, that cost $10,000 or even less. At the top price are hotels, which go over $5 million including the land. If you are interested in food service businesses, fast food restaurant cost from $250,000 to around $1 million or more, and full-service restaurants run between $750,000 and $3 millions or more. Car repair services run between $200,000 and $300,000. Keep in mind that the costs above are average expenses, and they still vary greatly from brand to brand.

Professional Fees

Even before closing the contract, you will have run up against costs like professional fees (hiring a lawyer to review the agreement and a professional accountant to work with the numbers). Before opening, depending on a type of business you are engaging with, you will incur costs such as building out office/store, inventory, all the needed equipment, employee training, insurance, rent, business licenses, rent, etc. Without even including the cost of buying your own real estate, which is a completely separate and great expense. You should also be prepared for the big opening. Promotional costs and advertisement are significant expenses as well. After all the initial expenses, there will still be multiple ongoing costs such as salaries, professional fees, supplies, rent, maintenance, work-clothes, etc.

Franchise Fee

Of course, the inevitable franchise fee. An expense that you will only pay once for the entrance to use the brand, operating system, and for the ongoing support in marketing, training, and managing. Usually, the fees are between $20,000 and $50,000, but in some cases, there are fees that cost below $20,000, or the ones that top $100,000 (high-end, more established brands). The initial fee usually covers the cost of training and support, but benefits that are included in the franchise fee are different for every brand. In rare cases, the money you pay for the franchise fee covers only the name of the brand. Make sure to explore and double check exactly what is it that you are getting in return for your money. If you are more safety oriented, explore all the brands with widespread franchises – in the end, no company could have that many franchises opened if there is no sales growth. For example, Chatime franchise has had a sales growth of 18.9% in 2017, making it very desirable for potential frachisees.

Also, keep in mind that once opened, you will have to be ongoing royalties, which are usually between 4% and 8% of gross revenues. Joint marketing and advertising fund are included as well (2%-4%).

Working Capital

This is the amount of money that is available to your business day-by-day. It varies from type of business you are involved with, but it is crucial that your working capital can cover a certain amount of time –at least six months, and the best would be two to three years. Or until your business starts flourishing so it can self-sustain. Franchiser will probably provide you with an assessment of the money needed, but it would be the best if you did your own research so you are sure that calculation is based on your location (and not the average of all franchises).

Some brands have special offers and discounts for minorities and veterans. Discounts usually include lower initial franchise fee expenses or lowered royalty rates. Special offers are not reserved only for minorities and veterans, but also for specific areas where the brand is seeking to expand.

In the end yes, all these expenses are not something you can deal with every day. But keep in mind that opening your own business could cost you even more. With opening a franchised business, you have a lot of support and benefits, as you are engaging with an already built brand. A franchisor can give you a pretty precise image of all the expenses including the ongoing ones, and pretty punctual estimation of when your revenue is going to turn from negative to positive – which are some great pieces of information that you cannot get when you are starting your own business.

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Written by Chloe Smith

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