Joel Libava
How much does it cost to buy a franchise?
While the answer to that question isn’t always straightforward, because it varies depending on the franchise type, understanding what the total initial and ongoing costs are can help you make an informed decision.
In this post, I’ll break down the different costs and franchise expenses involved in buying a franchise business.
This includes exploring your financing options, and providing valuable insights that will help you determine if opening a franchise is right for you.
How Much Does It Cost For A Franchise? Breaking Down Costs And Fees
When considering the cost of opening a franchise business, it’s essential to understand all the costs involved. And these costs can vary significantly depending on the franchise you’re buying and its specific requirements.
With that in mind, here are some of the potential franchise startup costs and fees.
Franchise Expenses
The following expenses and fees are part of your cost to buy a franchise.
Professional Fees
Before making any investment, including your investment in a franchise business, it’s crucial to seek professional advice from an attorney and an accountant. In this case, a franchise attorney and an accountant familiar with franchising/small business.
Why You Need A Lawyer
The reason you need to hire a franchise lawyer is to get help reviewing the Franchise Disclosure Document (FDD), and the actual franchise contract with you. Doing so can help ensure you completely understand all the terms of the agreement.
Another reason you’ll want an attorney who knows franchising?
Because there may* be an opportunity to negotiate part of the franchise agreement.
*There are no guarantees that an attorney will be able to negotiate anything for you. But sometimes one or two things can be negotiated. I always tell my clients they shouldn’t plan on getting anything changed in their agreement, but one never knows.
Franchise Costs: Why Should You Hire An Accountant?
When it comes to hiring an accountant, always ask if they have existing franchise and/or small business clients before you engage in their services.
With this in mind, it’s important for you to know that accountants can help you determine the correct business entity you need to form for your franchise.
In addition, they can set up payroll, and help you with business taxation. And a lot more.
Compare Business Formation Types HereFranchise Startup Costs
Startup costs for franchises encompass a wide range of expenses associated with getting a franchise business opened up.
These costs can include your initial franchise fee, business formation costs, furniture, fixtures, point-of-sale software, construction and architectural costs.
Plus, there are things like promotional campaigns, local marketing initiatives, starting inventory, equipment, insurance, employee training, business licenses, rent, landscaping, signage, professional fees and more.
And as I said before, your specific costs will depend on the nature of the franchise business you’re buying and its specific requirements.
Franchise Fee
The initial franchise fee is a one-time payment made to the franchisor for the right to use their brand, operating system, and receive ongoing support. The amount of the franchise fee can vary significantly depending on the franchise, but it averages around $35,000 and $40,000.
Royalty Fee
The royalty fee is an ongoing (monthly) payment you make to your franchisor. It’s almost always based on a percentage of your franchise’s revenues. Typically the percentage ranges from 4%-12% or more, depending on the type of franchise.
For example, a coaching franchise may require a 12% royalty payment, while a food or retail franchise may require you to pay 5% royalty. Why the difference? Revenue.
For instance, a coaching franchise may bring in $150,000 in revenue while a food franchise could do $500,000 or more in revenue. Plus there are more internal costs that the franchisor bears with food or retail. One more thing.
Some franchisors require you to pay a flat royalty on a monthly basis. That’s instead of paying them a specific percentage of your revenue.
Bottom line?
You need to consider the cost of the royalty when evaluating the potential profitability of the franchise, as it directly affects your net profit.
Working Capital
Working capital is the amount of money you need to have on-hand to cover the daily operational costs of your franchise business.
To that end, most franchisors recommend having at least six months’ worth of working capital on hand before starting your franchise. Why?
Because it ensures that you have enough funds to cover expenses until break-even and then when your business becomes profitable.
Note: A lot of franchisors include a specific amount of working capital in their “initial investment estimates” and in their FDD’s (see below).
In Total, How Much Does It Cost For A Franchise?
To determine the total financial investment required to open a franchise, you need to consider all the aforementioned costs. Those include professional fees, startup costs, franchise fees, royalty fees, and working capital.
And since every franchise concept has specific financial requirements, it’s crucial to carefully review the FDD provided by the franchisor.
That’s because the FDD contains detailed information about the investment costs. They include the initial investment estimate, ongoing expenses, and sometimes…potential franchisee earnings.
And to help you visualize your potential startup costs, here’s an example of how the initial investment estimate is presented in an a typical FDD:
| Name of Fee | Low | High |
|---|---|---|
| Initial Franchise Fee | $19,950 | $19,950 |
| Initial Territory Fee | $70,000 | $70,000 |
| Additional Territory Fee | $0 | $60,000 |
| Excess Costs of Training | $250 | $2,500 |
| Work Vehicle | $5,000 | $48,000 |
| Computer | $1,000 | $3,500 |
| Credit Card Processing Technology | $30 | $500 |
| Telephone Equipment | $60 | $120 |
| Auto Insurance | $500 | $2,400 |
| Commercial General Liability Insurance | $500 | $1,500 |
| Contractor’s License and Bond | $0 | $1,500 |
| Additional Tools and Supplies | $100 | $1,500 |
| Professional Services | $750 | $3,500 |
| Additional Funds (first three months) | $12,000 | $20,000 |
| ESTIMATED TOTAL | $110,140 | $234,970 |
Note: it’s important to know that these figures are just an example and can vary widely depending on the franchise.
With that said, reviewing the specific FDD and conducting thorough due diligence will provide you with a more accurate picture of the total financial investment required.
Financing Your Franchise Business
Once you have a clear understanding of the financial investment required, you’ll probably need to explore financing options to fund your franchise. Here are some of the more common methods of financing:
Small Business Administration (SBA) Loans
SBA loans are a popular financing option for franchisees. But know this:
The SBA is not the actual lender.
Instead, the SBA guarantees a portion of the loan, making it less risky for SBA approved lenders. Plus these lenders generally offer favorable terms and interest rates (depending on your credit and down payment).
7(a) Small Business Loans
The 7(a) loan is the most common SBA loan for franchisees and other small business owners, and has a maximum loan amount of $2 million.
Finally, when it comes to securing an SBA loan, you’ll need to meet certain qualifying criteria and provide a solid franchise business plan.
That’s right. Never walk into a bank or fill out loan paperwork without a written formal business plan.
Franchisor Financing
Some franchisors offer financing options. And some even work with affiliates to assist franchisees with funding.
Specifically, they may have arrangements with third-party lenders or provide direct financing programs to help franchisees cover initial costs like the franchise fee. And some may even offer equipment leasing programs for franchisee computer systems and more.
And while it’s not all that common, it’s worth checking with the franchisor to see if they offer any financing assistance or have partnerships with lenders.
Family and Friends
Another option for financing your franchise is to seek loans or partnerships with family and friends.
And although these types of loan and/or partnering arrangements tend to get complicated, in some cases it can help to share some of the financial responsibilities of the business. But know this:
It’s crucial to establish clear agreements and terms to avoid potential conflicts in the future. Because they can and do happen.
Using A Portion Of Your Retirement Funds
One choice that’s becoming increasingly popular is to use a portion of your retirement funds to finance a portion of your franchise business start-up. It’s called ROBS.
ROBS stands for “Rollovers for Business Start-Ups.” Basically, it’s a 401k funding program.
In essence, ROBS is a business financing solution that uses a portion of your retirement savings to fund a new or existing business. Now this is important.
There are no withdrawal or tax penalties if you use ROBS to fund your business venture. How does that sound?
Go here to learn more about this form of financing
On Opening A Franchise Business
To conclude, while it’s important to know how much it will cost you to open a franchise, you also need to make sure you’re ready for the time commitment-especially at first.
The good news?
Opening a franchise can be a rewarding business opportunity.
But it requires careful consideration of the costs and expenses involved.
And don’t forget to review the franchise disclosure document (with the help of a franchise attorney), seek professional advice, and leverage the support and training provided by the franchisor.
Because with proper planning and due diligence, you can embark on a successful franchise journey and realize your hopes and dreams.
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