The cost of buying a franchise will widely vary from franchise to franchise. However, there are several costs to consider that are common to most franchise opportunities. While the franchisor might help alleviate some of these expenses, aspiring franchisees should be financially prepared to open the franchise and run it until it becomes profitable.
What Is the Total Cost of Buying a Franchise?
When people search for the cost to buy a franchise, they often start with the franchise fee. However, the initial fee is only one part of the total investment.
The cost to open a franchise can include the initial franchise fee, real estate, construction or build-out, equipment, inventory, insurance, licenses, professional services, training expenses, marketing, and other startup costs. You will also need enough working capital to cover expenses while the business gets established.
The Federal Trade Commission (FTC) requires franchisors to provide prospective franchisees with a Franchise Disclosure Document (FDD), which contains 23 categories of information about the franchise opportunity. Item 7, Estimated Initial Investment, provides an estimate of the costs required to establish the franchise, which goes beyond the initial franchise fee.
It’s also important to distinguish between the cost to start a franchise and the ongoing costs associated with operating one. Expenses such as royalties, advertising fees, payroll, rent, inventory, insurance, technology, and supplies will likely continue after the business opens.
Why Franchise Costs Vary So Much
There isn’t one standard cost to buy a franchise. Franchise investments can vary significantly depending on the business model, industry, location, and level of infrastructure required to operate the business.
Brick & Mortar vs. Home-Based
For example, a brick-and-mortar franchise may require a commercial lease, build-out, furniture, fixtures, signage, and substantial equipment. A home-based or mobile franchise may have little or no traditional real estate or build-out expense, but could require vehicles, specialized equipment, technology, or additional marketing.
Geographical Location
Location also affects your investment. Rent, labor, construction, insurance, and other operating expenses can vary significantly from one market to another.
Types of Business
The size and type of franchise can make a difference as well. A restaurant, fitness facility, retail store, professional service business, and home-service franchise can have very different startup and operating cost structures.
That’s why comparing franchises based solely on their franchise fees can be misleading. Two franchises with similar initial franchise fees could have very different total investment requirements.
7 Common Franchise Costs to Consider
#1 – Initial Franchise Fee
The initial franchise fee is a one-time payment granting franchisees the rights to use the franchisor’s brand, trademarks, and business model. You pay for the privilege of being associated with a brand that has an established reputation and customer-base.
This fee typically ranges from $10,000 to $50,000, but it can exceed $100,000 for high-profile franchises. Additionally, franchises that require you to build a location will have a higher fee than a mobile or home-based franchise.
Exactly what the fee pays for is different for each franchise. However, the fee typically covers the cost of training, site selection, operational support, and initial marketing materials to help franchisees start successfully. In some cases, it will just act as a licensing fee for the rights to use the brand. Either way, make sure you do your research and review the Franchise Disclosure Document (FDD) so you know exactly what the franchise fee covers.
#2 – Legal and Accounting Fees
While these fees are on you, they are essential to ensuring the long-term success and smooth operation of the business. An attorney familiar with franchise law can review the FDD and franchise agreement with you. The cost of an attorney will depend on the fee and time needed to review the documents, but you’ll likely need to budget between $1,500 and $5,000 for initial legal services.
You should also work with a qualified accounting firm as soon as you decide to purchase a franchise.
An accountant can help you determine how much working capital you’ll need to get your business up and running. An accountant can also set up your books and records while making sure you comply with tax laws.
Keep in mind that legal and accounting services are not a one-time expense. Rather, you should plan to pay for continuous support as your franchise grows.
It’s also important to factor in the cost of obtaining and maintaining permits and licenses required by local laws.
#3 – Real Estate and Leasing Costs
The cost of establishing a business location is one of the most significant expenses for a franchise, particularly for brick-and-mortar businesses. Franchisees can choose to either lease or purchase a building. Leasing provides flexibility and lower upfront expenses, while purchasing demands higher initial costs but offers long-term equity benefits. Additionally, leasing expenses generally include security deposits, CAM fees, and tenant improvements.
Franchisees should also consider the build-out costs.
These include constructing the building and purchasing all the furniture, fixtures, equipment, signage, and anything else related to the building such as architectural drawings, zoning compliance fees, contractor fees, decor, security, deposits, insurance, and landscaping. Of course, if you choose a home-based franchise, there won’t be any build-out costs associated with it, but there may be expenses such as vehicles or computer setup. Build-out costs vary widely between franchises, ranging from $10,000 to $100,000 or more. Your franchisor will be able to give you an estimate of these costs.
#4 – Operational and Working Capital
Working capital is the amount of cash that’s available to a given business on a day-to-day basis. Since most businesses won’t turn a profit immediately, it’s crucial to have enough working capital to cover a given length of time.
A few things to consider regarding operational costs and working capital include:
- Initial inventory – This is the stock or materials a franchisee needs to launch the business and meet customer demand from day one. It requires careful management since buying too much can tie up cash flow, while too little may hinder the business’s ability to meet customer demand.
- Inventory costs – Depending on the franchise type (e.g. retail, restaurants, or service-based businesses), these costs could range from $5,000 to $50,000 or more.
- Inventory turnover rates – This is crucial for keeping fresh stock, avoiding waste (especially in food-based franchises), and maintaining profitability.
- Approved vendors – In order to ensure product consistency, franchisees are often required to purchase inventory from franchisor-approved vendors.
When reviewing the estimated initial investment, pay close attention to the working-capital amount and the period it is intended to cover. The amount you need can vary considerably based on the franchise model, location, staffing requirements, and how quickly the business generates revenue.
While the estimate in Item 7 gives you a starting point, it shouldn’t be treated as a guarantee of how much you’ll actually need. Talk with existing franchisees about their experience, and work with a qualified financial professional to develop a realistic estimate based on your circumstances.
#5 – Equipment and Inventory Costs
These are all the things you require to run your franchise. Restaurants will need food, of course, but they also need plates, cutlery, and napkins. Other franchises will need different things to offer their services. Your franchisor can provide a list or estimate of what you will need to successfully run your franchise. A few more things to consider include:
- Limited flexibility – Since franchisees often have to buy from approved suppliers to ensure quality and brand consistency, this may limit flexibility in pricing.
- Ongoing supply costs – Franchisees should regularly budget for items such as inventory and cleaning materials as they impact daily operations.
- Leasing options – In some cases, franchisees can lease equipment to reduce upfront expenses.
- Unexpected expenses – Plan for unknown costs such as repairs, maintenance, and upgrades to keep equipment functional and up to brand standards.
#6 – Training Costs
The long-term benefits of a well-trained franchisee and staff are invaluable. Not only does it improve operational efficiency and customer satisfaction, but it reduces costly mistakes in the long-run. Because of this, franchisors will provide training for franchisees and often the franchisee’s management team.
While the training itself is usually covered by the franchise fee, the traveling and living expenses to go to a franchise’s headquarters for that training may not be covered.
Often, training runs from a few days to a week and is followed up with more training back at the franchisee’s location.
You should first determine whether travel and accommodation expenses are covered by your franchisor. If not, work out how much the training-related expenses will cost you. This might include travel and lodging costs as well as payroll costs for staff during the training period.
#7 – Marketing and Advertising Fees
Marketing and advertising campaigns will help drive customer traffic to your location and support overall brand growth. Some key takeaways for the costs related to this include:
- National vs. Local – While franchisees often pay into a national ad fund, they are also responsible for local marketing expenses.
- Ongoing Fees – Advertising costs are continuous and generally based on a percentage of sales.
- Flexibility – National campaigns are managed by the franchisor. However, franchisees have more control over their local marketing efforts.
- Co-Op Programs – Some franchises participate in cooperative advertising programs to share the cost of regional campaigns.
- Measure ROI – Franchisees should track marketing ROI to ensure their investment is paying off in terms of increased sales and brand awareness.
One-Time vs. Ongoing Franchise Costs
When calculating franchise costs, it helps to separate expenses into two broad categories: one-time startup costs and ongoing operating costs.
One-Time Franchise Costs
These are expenses you may incur before or around the time your franchise opens. Examples include:
- Initial franchise fee
- Real estate deposits
- Build-out and construction
- Equipment and furniture
- Initial inventory
- Initial licenses and permits
- Professional fees
- Initial signage and marketing
- Training-related travel expenses’
Ongoing Franchise Costs
Once the business is open, you’ll need to budget for recurring expenses such as:
- Royalties
- Advertising or marketing fees
- Rent or lease payments
- Payroll
- Inventory and supplies
- Insurance
- Utilities
- Technology and software
- Equipment maintenance
- Accounting and other professional services
Some expenses are relatively predictable from month to month, while others can fluctuate based on sales, staffing, inventory needs, or other operating conditions.
Frequently Asked Questions About Franchise Costs
How much does it cost to buy a franchise?
The cost to buy a franchise varies widely depending on the franchise brand, industry, business model, location, and other factors. The initial franchise fee is only one part of the total investment. Review Item 7 of the franchise’s FDD to see the franchisor’s estimated initial investment, including applicable startup expenses.
What are the costs associated with operating a franchise?
Operating costs vary by franchise, but may include royalties, advertising fees, payroll, rent, inventory, supplies, insurance, utilities, technology, maintenance, and professional services. Your ongoing costs will depend on the specific franchise and the market where you operate.
What is the difference between the franchise fee and the total franchise cost?
The franchise fee is generally the upfront fee paid to the franchisor to become a franchisee and obtain the rights associated with the franchise system. The total franchise cost is broader and can include expenses such as real estate, equipment, inventory, professional fees, and working capital.
Where can I find a franchise’s estimated costs?
Start with the franchise’s current Franchise Disclosure Document. Item 7, Estimated Initial Investment, provides information about the estimated costs required to establish the franchise.
Does the cost listed in an FDD guarantee what I will spend?
No. Item 7 provides the franchisor’s estimated initial investment, but your actual costs can vary. Location, real estate, labor, construction, financing, and other factors can affect your total investment. Review the assumptions behind the estimates and discuss them with the franchisor, existing franchisees, and qualified professional advisors.
Are You Interested in Buying a Franchise?
Opening a franchise is often less expensive than opening a business from scratch, and there are some serious perks to signing on with an established brand. Schedule a free consultation with FranNet and get started today! Our expert franchise consultants will help you understand your options for business ownership.