Whether starting your own company has always been your ambition or the epidemic has made you reevaluate your job, a lot of individuals are starting to think about switching careers. Becoming a franchisee is one method that can make that change. Although final data are still a bit premature, different reports suggest that many franchises did well in adapting to the changes brought about by the pandemic.
In 2024, franchising is anticipated to increase at a faster rate than initially projected. As to the International Franchise Association, this rise might result in a significant boost in GDP revenue and an increase in the number of employed individuals.
One of the most important things to think about if you're considering purchasing a franchise is the cost. Whether you want to go for it alone or take advantage of an established franchise's support and direction, starting your own business is a significant financial commitment.
This blog brings the entire breakdown of the cost of buying a franchise. When you have successfully learned about the costs of a franchise, you will easily understand how to franchise your business. In this guide, we'll break down the various costs associated with buying and operating a franchise, helping you to make an informed decision.
- Initial Franchise Fee
The amount you pay the franchisor up front for the privilege of running a franchise under their name is known as the initial franchise fee is actually the amount that you have to pay to acquire the rights of running the franchise of a business at another location under the same name. There can be a big impact on this fee depending upon the franchise brand, industry and the location. This is because of the reputation that the business has earned over the years, it would likely want to charge something to hand over the rights. The typical price range is between $20,000 to $50,000, while certain well-known franchises may want much more. When you pay this charge, you are usually given an advantage of having access to the franchisor's support networks, business plan, and brand. This helps in instantly setting up the business and starting to earn revenue.
- Franchise Setup Costs
There are several setup costs that are needed to be considered after the initial franchise fee. These are also known as startup costs and can include the following:
- Real Estate: There are location expenses in this category. Examples of location expenses can include mortgage down payments, real estate agency commissions, and utility security deposits. There may be additional expenses for labor and materials if the property has to be improved. A practical example of this is that setting up a fast-food restaurant will generally cost more than opening a service-based franchise. This is due to the requirements of different space and equipment.
- Equipment/Inventory: In majority of the franchises the franchisees are required to buy particular goods and equipment. This is because of the different operations of each business. For instance, a retail franchise may need inventory stock, but a gym franchise might need exercise equipment and a lot more different stuff. These may cost anywhere from several thousand to several hundred thousand dollars.
- Signage and Branding: Franchise agreements often require you to invest in signage and branding that aligns with the franchisor's standards. This ensures consistency across all locations and can add to the initial costs.
- Training and Support Fees
To help the franchisees get their franchises efficiently settled up and running, some franchisors typically provide initial training and ongoing support. Although some of these services are included in the initial franchise fee, others might come with additional costs. Franchisors do charge some amount to offer particular services. The initial training programs can cover operational procedures, marketing strategies, and customer service practices. If there are additional fees for these services, they are to be outlined in the Franchise Disclosure Document (FDD).
- Marketing and Advertising Fees
The brand recognition of a franchise is one of its biggest draws. It stands to reason that as a franchisee, you should benefit from the considerable time and resources franchise firms invest in promoting their brand to prospective clients. You will normally pay monthly marketing and advertising expenses, which are often a proportion of your revenue, in exchange for this marketing help. The typical range of marketing fees is 2% to 5% of total sales.
- Ongoing Royalties
In addition to the initial franchise fee, you’ll be responsible for ongoing royalty payments. Royalties are typically a percentage of your gross sales and are paid to the franchisor for the continued use of their brand and support services. This percentage usually ranges from 4% to 8% of your monthly sales. It's crucial to factor these payments into your financial projections as they can significantly impact your profitability.
- Operational Costs
There are several operating expenses associated with operating a franchise, such as:
- Salaries of Employees: Employing and compensating employees is a major continuous expense. The size and style of the franchise will determine how many workers there are and how much they make.
- Utilities: Depending on your region and the kind of franchise, prices for water, electricity, and other utilities may change.
- Supplies: To keep the firm operating efficiently, regular purchases of inventory and supplies are required.
- Insurance: To safeguard your investment, you must have enough insurance coverage. Depending on the kind of business and the coverage needed, insurance costs can change.
- Legal and Professional Fees
Before signing a franchise agreement, it’s advisable to consult with legal and financial professionals to ensure you fully understand the terms and implications. Legal fees for reviewing the franchise agreement and other documents can range from $1,000 to $5,000 or more. Financial advisors can help you create a comprehensive business plan and financial projections.
- Contingency Funds
It's wise to set aside contingency funds to cover unexpected expenses or initial operational losses. A recommended practice is to have at least three to six months’ worth of operating expenses saved up as a buffer. This can help alleviate financial stress and provide a cushion as you work to build your business.
- Financing Options
A lot of franchisees look for finance in order to pay for the expenses involved in starting and running a franchise. Choices consist of:
- SBA Loans: Many franchisees may find it advantageous to take advantage of the loans that the Small Business Administration (SBA) provides especially for franchise firms.
- Conventional Bank Loans: Another alternative is to apply for a conventional loan from a bank or credit union, but be aware that these loans may need a thorough business plan and a solid credit history.
- Franchisor Financing: A few franchisors provide financing alternatives or collaborate with lenders that focus on financing franchises.
Conclusion
The cost of acquiring and running a franchise varies greatly based on the area, business, and brand. Even if the initial franchise fee is a substantial outlay of funds, it's crucial to take recurring royalties, operating expenses, marketing fees, and other charges into account. To guarantee that you are ready for the financial commitment of owning a franchise, make sure to plan ahead carefully, conduct extensive research, and contact legal and financial professionals.
You may make a better judgment and improve your chances of operating a profitable franchise firm by being aware of the whole range of costs related to franchising and understand the crucial pre-requisites of how to franchise your business.
