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Franchise Costs: What to Consider When Choosing Your Next Opportunity

If you are thinking of becoming a franchisee, one of the critical considerations is the franchise costs.  Starting your own business is a serious investment, whether you go it alone or choose to join the support and guidance of an existing franchise.

How much does it cost to buy a franchise?  What things should you consider when looking at franchise costs?  According to Seth Lederman, a Forbes Business Council Member, here is a breakdown of the potential franchise costs.

Franchise Fees

There are several fees that you will pay for your chosen franchise.  Some are at the beginning, like professional fees to an attorney to review your franchise contract.  Some are ongoing costs, such as royalty fees that will be regularly paid to the franchisor.  Here is a list of the typical franchise costs.

  • Professional Fees:  In addition to having a lawyer review the franchise contract, you may also elect to engage with an accountant to help you go through all of the numbers, before you make an investment in the franchise.
  • Startup Costs:  There are potentially several expenses associated with getting your new franchise going. These can include franchise fees, rent, inventory, equipment, employee training, business licenses, landscaping, signage, and more. Other potential costs can include furniture, fixtures, POS system, construction costs, decor packages, advertising, promotional campaigns, etc.
  • Franchise Fee: This is a one-time cost of entering a franchise. Paying the upfront franchisee fee unlocks the door to the franchisor’s proprietary business systems. This franchise cost is a license to own and operate the franchise business.  The amount depends on the franchise.  The average franchise fee ranges from $20,000 or $50,000.  This will be paid when you first purchase your franchise.
  • Royalty Fees:  These fees are based on a percentage of your franchise revenues and are typically paid monthly to the franchisor. Typically, they range from 4% to as much as 12% or more, depending on the type of franchise.  Franchisors make their money from franchisees with these fees.  As long as you are a franchisee, you will pay royalty fees.
  • Operating Capital:  Also often called working capital, this is the amount that you need to have available to cover the daily operations of your franchise. Franchisors typically advise you to have at least six months of operating capital on hand before starting your franchise. It can take months before your franchise generates enough revenue and is profitable enough to cover the costs.
  • Transfer Fee:  While this is not an initial franchise fee, a transfer fee is paid when a franchisee sells their business and transfers their rights as a franchise to another party.  The new franchisee will pay the franchisor a transfer fee, which is either a fixed amount or a percentage of the franchisor’s typical franchisee fee.
  • Renewal Fee:  At the end of the term of the franchise agreement, depending on the franchisee’s right to renew, they may elect to enter into a successor agreement.  Similar to the transfer fee, the renewal fee is usually lower than the amount charged to new franchisees.

These expenses add up to the total financial investment of your franchise.

Time Costs

In addition to the franchise costs, it’s important to consider how much time will need to be invested to pursue your dream of owning your own business.  Your time is valuable and you should consider how much of you, your energy and your focus will be required.

Consider the type of franchise that you are pursuing. With an owner/operator franchise, you are the business. This is an ideal choice for those who want to go out and service their clients.  In an owner/operator franchise model, you can expect to make a serious time investment because you are the one doing all the work.

An executive model franchise is another option.  This type of franchise is an investment strategy.  Executive model franchise owners do this as a means of diversifying their portfolio.  The executive model doesn’t mean that it won’t require any of your time commitment or energy.

With executive model franchises, there is mis-perception that the owner can step away and the business will run itself.  There is no franchise that runs itself; the franchisee will have to be involved.  This involvement can include managing it yourself or managing your manager.

Finally, a third model is a blend of the two. With this model, your involvement will be closer to the owner/operation model in the beginning.  In the beginning, your involvement in the franchise will be closer to the owner/operator model. You will be running things on a daily basis.  As the business becomes established however, you will be able to take a step back and modify your schedule.

For many, the final model is the goal.  They envision a business that will allow them to eventually step away and relax or travel.  They do not want to buy themselves a job that requires their attention for five days a week, eight hours a day.

The end result should be a business in which you enjoy what you are doing.  No doubt, owning your own business is hard work, but you can determine the amount of work to a large degree, depending on what you want.  Be clear about the level of involvement that is required and that you want to give before you start, and you will find that you can achieve a much higher rate of satisfaction in your new endeavor.

There are many ways to achieve to realize your dream of owning and operating your own business.  One of the advantages of choosing a franchised business is that you enter knowing what the franchise costs are.  Franchisors can provide a very accurate picture of what it will cost to start the business, your ongoing expenses and a good estimate of when your revenue stream will turn positive.  This is valuable information that you won’t have if you start your own business.

Full Forbes Business Council article.

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