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What are the Costs to Open a Franchise?

Guest post by: Global BX

Article Overview: When deciding which type of business to purchase, you need to determine the franchise cost and the details of what it covers. It is not that difficult to come up with a ballpark figure on franchise costs as there are many commonalities among the different franchising fields.

What are the Costs to Open a Franchise?

The Franchise Costs

Buying and managing a franchise are among the best ways to ensure financial freedom and success. There are thousands of franchise opportunities available in various industries. All you need to have are dedication, commitment, and a good amount of money for capital. Questions regarding the costs to open a franchise are the top concerns of most prospective franchisees. When deciding which type of business to purchase, you need to determine the franchise cost and the details of what it covers. It is not that difficult to come up with a ballpark figure on franchise costs as there are many commonalities among the different franchising fields.

How Much Does a Franchise Cost?

All companies that offer franchising as part of their operating systems charge a standard franchise cost. This initial fee serves as payment for training, ongoing support, and assistance on relevant aspects such as choosing site selections, especially if your prospect business needs a storefront or a retail type setup. The average cost to open a franchise ranges from $20,000 to $50,000. The data is based on an analysis of a wide range of franchises available nowadays. Accordingly, the more popular and established the brand is, the higher the franchise costs. However, franchises at the low end range are more affordable. Most of the low-priced franchises you can find today are usually mobile or home-based operations. When you decide to open a franchise, you need to buy supplies and inventory, as every franchise contract states the use of specific items. This is a requirement of most franchisors to ensure standard and quality in franchise operations. As an example, a certain fast-food restaurant's hamburgers look and taste the same in all its branches because the franchisor has its own set of suppliers that ensure the consistency of its products. The cost of inventory and supplies can range from $20,000 to $150,000, depending on the type of franchise you intend to purchase.

Added Franchise Costs

Another franchise cost that you will encounter when purchasing a franchise is the legal fee. You will need to sign franchise documents, consider property and equipment leases, as well as review financing terms. A franchise attorney would usually charge anywhere between $1,500 and $5,000 as professional fee. If an office or a warehouse is required in your business, you need to pay real estate construction fees for a new building or remodeling fees for an already existing space. These are necessary expenses to customize your business space according to your particular needs. The costs vary depending on the existing real estate value in the business area. The average cost to build-out an existing location ranges from $20 to more than a hundred dollars, per square foot.

Royalty Fees and Working Capital

There are two other categories to round up the list of franchise costs. Almost all companies require a recurring royalty fee to all its franchisees. This fee serves a dual purpose; first, to fund the national ads and marketing campaigns that benefit every franchise owner, regardless of location; and second, to serve as primary revenue source for the parent company, especially if they do not operate locations of their own. This type of franchise cost can range from a meager percentage of the franchise's gross sales income to as much as 12 to 15 percent. The last element of the franchise costs process is the working capital. This is basically the funds that allow start-up businesses to get through the early days of operations, when sales are low. This is handy until a loyal customer base is developed. Prospective franchisees must have at least six months of working capital available. The franchise costs covered in your working capital include taxes, rent, advertising, insurance, restocking of supplies and inventory, payroll, and royalties. As a rule, set aside an amount twice that of your startup cost and use the extra cash as security against unexpected situations or circumstances.

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Article Tags: Costs to Open a Franchise, franchise cost, franchise costs, franchise fees, franchises, open a franchise



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Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Info for would be franchisers... - [quote="Sebastien":2gam0klq][quote="BuzzAroundBooks":2gam0klq]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to.[/quote:2gam0klq][/quote:2gam0klq] That is really what I look for in any industry publication. We lead busy lives and when people fill their magazines with fluff, not only does it benefit no one, but it makes us truly appreciate those that don't. Thanks!


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