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 (about 2 to 4 percent).

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.

Entry costs vary based on the brand, size (population) of the territory awarded, real estate, and the level of services and support. Some brands offer incentives and operating models for new franchisees to get them started and through their start-up years. Examples include reduced royalties for the first year or two; deferred franchise fees; or smaller-scale versions of their brick-and-mortar concepts.

Many franchisors offer discounts to veterans, minorities, and women. As noted above, these can include lower initial franchise fees and/or reduced royalty payments. Franchisors usually promote these incentives on their website. The International Franchise Association's VetFran program is a good place to learn more about these discounts and programs.

Franchisors also offer limited-time deals on franchise fees and royalties, deferred payments, money-back guarantees, and other promotional incentives. These can be limited to specific geographical areas or markets where the brand is seeking to break in or expand its penetration.

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.