A lot of entrepreneurial candidates are easily sold on the idea of using franchising as a vehicle to business ownership. But just as many are curious about the cost. If a prospective client asks me, “How much does it cost to buy a franchise?”, I can’t answer the question with singular accuracy. There are too many dependent financial factors that go into each franchise concept. Some are expensive, but come with widespread name recognition and a stellar business reputation. Others are cheap, but require more of the franchisee than most other choices. Every one of the other concepts (north of 3,000 or so) fall in between.
But when a candidate requires formula to investigate all franchises equally, there are associated fees that apply to all concepts. As you review these costs, keep in mind: there is no automatic correlation between what it costs to buy a franchise and how much money you will make. The purchasing price of the franchise concept has little to do with how much revenue you’ll potentially earn.
Franchisors only consider franchisee candidates who meet the brand’s net worth requirements. In the most common of transactions, you should plan on paying 25-30% of the total investment in cash, while financing the balance. Additionally, some concepts may require enough operating capital on hand to reach break-even status. FranNet can refer you to several lending options for the financed balance.
Initial Franchise Fees
When you buy a franchise, you’re responsible for the initial fee and ongoing royalty payments. What you’re purchasing in the deal are the trademarks, training, operations support, a defined territory, and access to the proprietary business model for generating revenue from the franchise’s product or service. The initial franchise fee is a one-time payment, determined on a sliding scale, and the brand’s profitability typically determines the investment range.
Royalty payments are ongoing. They may be due each month, or each quarter, and the rate is determined by the calculating a percentage of the brand’s gross sales. Many franchisors use royalties as part of their negotiating process. The usual range for royalties is typically four to 12%.
Additional Costs to Consider
The initial fee, royalty payments, and sometimes operating capital, are universal and apply to all franchise concepts. However, some franchise opportunities require additional costs above and beyond these universal considerations. Depending on the concept, examples of these costs may include buying a storefront or leasing a location, security deposits, special equipment, minimum inventories, and even co-op marketing program fees.
But if you do your research, you’ll never be caught off-guard. These additional costs are shared with franchisee candidates in the brand’s Franchise Disclosure Document (FDD). Franchisors are required to disclose all expenditures under the FTC’s Franchise Rule. This rule mandates that prospective buyers get access to the full financial cost disclosures in order to make a sound and rational decision on moving forward with a purchase.
One More (Important) Cost
While it’s not required, you’d be hard pressed to find any franchise broker or consultant who won’t insist that you have your purchasing plan reviewed by both a legal and an accounting professional. Though you’ll pay for these reviews, they’re an important aspect of due diligence that could protect you from entering into a bad deal.
If you’re all in for 2021 and want to begin an entrepreneurial journey, FranNet of Dallas-Fort Worth is standing by to assist you. We want to know if business ownership through franchising is something you’d like to hear more about. To begin your Entrepreneur Readiness Profile, please reach out and schedule a no-cost, no obligation meeting with us. Together we’ll find and match you with a franchise that meets your standard of business ownership and lifestyle goals.