The Costs Involved In Opening A Franchise

You have to spend money to make money. So the old saying goes.

In franchising you can spend a lot or a little, and still make money. Once you've decided 1) that you want a franchised business, and 2) what industry segment you'd like to work in (fast food, home repair, pet care, etc.), it's time to determine what you can afford. Your "budget" will limit your choices.

The cost of entry varies greatly, by both the segment you choose and the franchise brand you select within that segment. While costs range from less than $10,000 to upwards of $5 million, the majority of franchises run from about $50,000 or $75,000 to about $200,000 to get started.

Knowing how much you have to invest at the front end for the franchise fee and to set up your operation - whether a retail store with inventory and staff, or a home-based or mobile business with just one employee (you) - allows you to focus realistically on which industries and which brands to consider.

At the low end, you can get into a home-based or mobile concept for $10,000 or less. At the high end are hotels, which can cost more than $5 million, including the land. Full-service restaurants run from about $750,000 to $3 million or more. Fast food restaurants cost from about $250,000 to $1 million and up. Auto repair and maintenance facilities run between $200,000 and $300,000. Note these are average ranges, and the cost of entry will vary from brand to brand.

Even before you sign a franchise agreement, you will incur costs such as professional fees (an attorney to review the contract and an accountant to work the numbers). And before you open, depending on the type of business you choose there will be costs for building out your store or office, inventory, equipment, insurance, employee training, business licenses, rent, landscaping, signage, etc. Buying your own real estate can be a significant, separate expense. Also be prepared for grand opening and initial advertising and promotional expenses. After you open there ongoing expenses such as interest (if you have a loan), supplies, salaries, professional fees, rent, utilities, maintenance, uniforms, and more.

Then, of course, there is the franchise fee - the one-time entry price to use the franchisor's brand, operating system, and to receive ongoing support in management, training, marketing, and more. Franchise fees generally run in the $20,000 to $30,000 range, though they can top $100,000 for higher-end, more established brands. Once open, there are ongoing royalties to pay, which typically range from 4 percent to 8 percent of gross revenues and include an ongoing assessment for a joint marketing and advertising fund.

Franchisors usually have minimum financial requirements before seriously considering a candidate:

• Liquidity - Unless you're printing money, your franchise business will take time to turn a profit (your franchisor should be able to tell you how long). Franchisors know this and usually require new franchisees to have a minimum amount of liquidity in order to keep the business afloat during its first year or more, until your bottom line turns from red to black.
• Net worth - Franchisors also usually set a minimum level of net worth before they consider someone a true candidate for their brand.

For example, a Burger King will cost about $2.2 million for a typical restaurant--if you meet the minimum financial requirements of $1.5 million in net worth and $500,000 in liquid assets.

Entry cost also will vary based on the size (population) of the territory awarded and the level of services and support. For example, TSS Photography offers four different plans to potential franchisees, based on population and on the services, equipment, and training provided (territory cost ranges from $35,000 to $56,500). Another photography franchise, Clix!, offers two options: 1) a full studio version, from $218,725 to $381,040 (est.); and 2) an on-location (no studio) version from $36,235 to $77,510 (est.).

The franchise fee at Computer Medics of America is $5,000 for a population up to 150,000, and $20,000 for population of 850,000 to 1 million; after 5 years, a franchise fee of 25 percent of the initial fee is required to renew for 10 more years. At Nerd Force, which has a franchise fee of $12,000 for the first territory and $8,000 for each additional territory, total startup costs range from $25,100 to $54,000 for a territory with an approximate population of 120,000.

An increasing number of franchisors offer discounts to veterans, minorities, and women. Incentives for vets, minorities, and women can include lower initial franchise fees and/or reduced royalty payments. At Nerd Force, for example, veterans receive a $4,000 discount off the initial $12,000 franchise fee; other franchisors offer discounts of 50 percent or more. Franchisors usually promote these incentives on their website. The IFA (International Franchise Association) website is a good place to learn more about these discounts and programs.

As the economy tightened in late 2008 and 2009, many franchisors began offering limited-time deals on franchise fees and royalties, deferred payments, money-back guarantees, and other promotional incentives. Some examples:

• In March 2009, Port City Java announced a "No Royalty" promotion for the Carolinas under which any new franchisee will pay no royalties until 2011.
• HomeVestors ("We Buy Ugly Houses") offered an "associate franchise" license for a $12,000, part-time, home-based program instead of $49,500 for its full-time, office-based format.
• SKYshades offered a full refund of its $75,000 initial investment if new franchisees do not generate $1.5 million in revenue in their first three years. They are not alone in offering special incentives to attract new franchisees.

Although the entry costs and ongoing expenses of getting into franchising may seem steep, it also costs money to start your own business. One of the advantages of choosing a franchised business is that you enter with your eyes wide open regarding startup and future costs. Based on the experience of existing franchisees, franchisors can provide you with a very accurate picture of what it will cost to start the business, your ongoing expenses, and a good approximation of when your revenue stream will turn positive--valuable information you won't have if you start your own business.