Pulling Back the Curtain on Franchise Costs

Buying and running a franchise can be a lucrative business opportunity—but it comes with various costs and financial considerations. These costs can vary significantly depending on the franchise brand, industry, location, and size of the business.

There shouldn’t be any unwelcome surprises when buying a franchise, and we want everyone to know exactly what to expect when making such a life-changing investment. So here’s a guide defining the typical franchising initial investment, startup costs, operating costs, and more. Read on!

When starting and operating a franchise business, you need to understand the costs

If you’re considering the entrepreneurial route, franchise ownership has numerous benefits.

The allure is clear: franchises often offer a proven business model, brand recognition, and ongoing support from the franchisor.

However, while the prospect of stepping into an established system is enticing, potential franchisees should be well-informed about the costs involved. Being equipped with this knowledge helps in making a well-informed decision and ensuring the venture is a successful one.

Franchise cost definitions

Reference these terms before and throughout your franchise investment journey so you’re always comfortable with their meaning and relevant impact on your situation.

Initial franchise fee

An initial franchise fee is a one-time, upfront payment that a franchisee (the person or entity buying the franchise) pays to the franchisor (the company or organization granting the franchise rights) in exchange for the right to operate a franchise unit under the franchisor’s brand name and business model.

Investment costs can range widely, but you might expect to pay anywhere from $10,000 to $1 million, depending on the brand and industry.

Real estate and leasehold improvements

When buying a franchise, real estate and leasehold improvements relate to the physical location of your franchise business.

Depending on the franchise model and industry, you may either purchase or lease real estate for your franchise unit. Here’s what these terms mean:

1. Real Estate: Refers to the physical land and any buildings or structures located on that land. When you buy real estate for your franchise, you become the owner of the property. This can be a significant investment and comes with responsibilities such as property maintenance, property taxes, and potentially mortgage payments if you finance the purchase.
2. Leasehold Improvements: Leasehold improvements, also known as tenant improvements, are alterations or enhancements made to a leased commercial space to make it suitable for operating your franchise. These improvements are typically necessary to adapt the space to the specific needs and requirements of the franchisor’s business model. Leasehold improvements can include things like interior renovations, electrical or plumbing work, flooring, lighting, signage, and fixtures.

Equipment and supplies

These costs are associated with acquiring the necessary tools, machinery, and materials to operate your franchise unit efficiently. The specific equipment and supply requirements can vary widely depending on the type of franchise and the industry it belongs to.

Some examples include:

• Any necessary equipment
• Furniture and fixtures
• Inventory
• Supplies
• Technology and point-of-sale systems
• Vehicle costs (if applicable)

Make sure you outline these costs clearly when creating a budget for your new franchise. They can be a significant part of the upfront costs, or a lesser consideration, but that is completely dependent on the business you are buying into.

For example, a retail store might spend $50,000 to $150,000, while a food franchise could be looking at $100,000 to $300,000. Just be sure to stay on top of it!

Working capital

This is the amount of liquid assets or funds you need to cover your day-to-day operational expenses and obligations as you start and operate your franchise business.

It’s a crucial financial component that ensures your business can run smoothly, meet its short-term financial needs, and handle unexpected expenses. Working capital is essential for maintaining business operations and financial stability.

Royalties (very important)

Royalties, in the context of buying a franchise, are ongoing fees that franchisees pay to the franchisor.

These fees are typically based on a percentage of the franchisee’s gross sales or revenue. Ongoing royalties are one of the primary sources of income for franchisors and serve several purposes:

• Brand Use and Support: Royalties grant franchisees the right to use the franchisor’s established brand name, trademarks, logos, and business model. In return, the franchisor provides ongoing support, including marketing, advertising, training, and access to the franchisor’s resources and expertise.
• Continual Franchisor Support: Franchisors use the royalties collected from franchisees to fund ongoing support services, which can include marketing and advertising campaigns, research and development, training programs, updates to operational systems, and ongoing communication and guidance.
• Consistency and Uniformity: By collecting royalties based on a percentage of sales, franchisors incentivize franchisees to maintain and grow their businesses, as higher sales result in higher royalty payments. This system helps ensure consistency and uniformity across all franchise units and aligns the interests of both the franchisor and franchisees.
• Brand Growth: The revenue generated from royalties often supports the franchisor’s expansion efforts, allowing it to open new franchise locations, develop new products or services, and enhance the overall brand presence in the market.

And royalties can be structured in various ways, including:

• Percentage of Gross Sales: This is the most common royalty structure, where franchisees pay a fixed percentage (e.g., 4% to 10% or more) of their gross sales to the franchisor. The percentage can vary depending on the franchise brand and industry.
• Fixed Royalty Fee: Some franchises charge a fixed dollar amount as a royalty fee rather than a percentage of sales. This approach provides more predictability for franchisees but may not adjust for variations in sales volume.
• Sliding Scale Royalties: In certain cases, the royalty rate may be tiered, with higher sales resulting in lower royalty percentages. This incentivizes franchisees to achieve higher sales levels.

Royalties are typically paid regularly, such as weekly, biweekly, or monthly, and are outlined in the franchise agreement and the franchise disclosure document (FDD). It’s important for prospective franchisees to carefully review the FDD to understand the royalty structure and any other ongoing fees or financial obligations associated with the franchise.

Marketing and advertising

Franchisees are often required to contribute to a national or regional marketing and advertising fund. This cost is usually a percentage of your gross sales and can range from 1% to 4% or more.

The specific marketing and advertising costs can vary widely depending on the franchise brand, industry, and geographic location. Franchisees should also consider their ability to fund these marketing materials and efforts as they are critical for driving customer traffic and revenue to their franchise unit.

While you’ll benefit from national advertising campaigns, you might also be required to contribute to a marketing fund or spend a certain amount on local advertising.

Training and support fees

Training and support fees refer to the costs associated with the initial training and ongoing support provided by the franchisor to franchisees.

These fees are designed to help franchisees learn and implement the franchisor’s business model, systems, and standards effectively. Training and support are critical components of a successful franchise relationship, as they enable franchisees to operate their businesses in accordance with the franchisor’s established methods and maintain brand consistency.

Insurance

Just like with any business, property ownership, vehicle, etc. You’ll need to purchase insurance coverage for various aspects of your business, including liability, property, and worker’s compensation.

This is compulsory to any respectable franchise arrangement.

Legal and accounting fees

You may need to hire lawyers and accountants to review the franchise agreement, set up your business structure, and handle ongoing financial matters.

Setting up any business requires certain legal formalities. Expect to pay for business licenses, permits, and representation that will make you confident in moving forward with an investment.

Franchise renewal fees

Franchise renewal fees are charges that franchisees are required to pay to the franchisor when their initial franchise agreement term expires, and they wish to renew or extend their franchise agreement for an additional period. These fees are not a one-time expense like the initial franchise fee but are instead associated with the continuation of the franchise relationship.

Franchise renewal fees are an important aspect of the franchise relationship, and franchisees should carefully consider their terms and costs when deciding to renew.

Consulting with legal and financial advisors experienced in franchise matters can help franchisees navigate the renewal process and negotiate terms that are favorable to both parties.

Remember there are sometimes miscellaneous fees with certain franchises (technology or software licensing fees, and fees for attending mandatory training sessions or conferences, etc.), and you need to be able to cover your own personal expenses while you get your new franchise business off the ground.

Just don’t get in over your head!

Cost expectations for popular industries

Certain industries and brands spring to mind when hearing the word “franchise.”

Here are some ranges—of initial franchise investment only—within some key franchising sectors for your consideration:

• Fast Food Restaurants: Costs can range from $250,000 for smaller, lesser-known brands to upwards of $2 million for established chains like McDonald’s.
• Retail: Depending on size and location, expect to spend between $150,000 and $500,000.
• Service Franchises (like cleaning or repair services): These can be more affordable, often ranging from $50,000 to $150,000.
• Health & Fitness: Gyms and wellness centers can require an investment of $100,000 to $500,000, depending on equipment and location needs.

Food for thought, but be sure to keep all the definitions above in mind, as the key point of this article is to inform you that the costs of owning a franchise don’t stop after one initial investment.

Financing and borrowing options for franchisees

Acquiring the needed funds can be a hurdle, but several options exist:

• Franchisor Financing: Some franchisors offer in-house financing or have partnerships with lenders.
• Traditional Bank Loans: Banks and credit unions might provide term loans if you have a solid business plan and good credit.
• SBA Loans: The U.S. Small Business Administration offers loans for franchises, with favorable terms and rates.
• Equipment Leasing: Instead of buying, you can lease equipment, which can be more cost-effective in the short term.

Stay tuned for more detailed content surrounding cost expectations and borrowing options–coming soon!

Fibrenew keeps franchise costs as simple as possible

Embarking on a franchise journey is undoubtedly an exciting endeavor. While there are costs to consider, the rewards—both financially and personally—can be substantial.

At Fibrenew, we want everyone involved to be as successful as possible. For example, we don’t take a royalty that scales with revenue, we keep a technical fee that stays the same no matter how profitable your franchise becomes.

This is just one of many ways we treat our franchisees like family.

Get in touch today to hear more about how becoming a Fibrenew business owner is the perfect fit. Stay tuned!

 

 

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