The Costs of Owning a Franchise

what is a franchise fee

Your Guide to Franchise Ownership

There is an estimated 775,000 franchise establishments in the U.S., and that number continues to grow. Why? Because the franchise model works! By leveraging a proven system, support and training, you can step right into a franchise business much more seamlessly than starting from scratch. But you have to do your due diligence... and that's where the IFPG Franchise Buyer's Guide comes in.

By arming yourself with knowledge and information, you can be well on the way to a new path as a franchise business owner. We have you covered every step of the way!

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Buying a Franchise Can be Costly, so It is Important to Know What Those Costs Are

There are many costs to consider when investing in a franchise. They vary depending on the brand, but the requirements are similar. In addition to the franchise fee, there are other expenses like furniture and equipment as well as professional fees, contractor fees, signage, and inventory. Here is a breakdown of fees you’re likely to encounter on your way to becoming a franchise business owner and also once you’re open for business.

Legal and Accounting Fees

When considering whether or not to buy a particular franchise, a franchise attorney can be a great resource. The attorney will go over the Franchise Disclosure Document (FDD) with you. Although this massive document may be intimidating, an attorney can walk you through the important parts. While there isn’t a set fee to review the FDD, plan for somewhere in the range of $1,500 and $5,000 for this service. As a franchise business owner, it is imperative that you keep impeccable records and files taxes on time, which is where an accountant comes in. The franchisor may provide you with bookkeeping tools, but an accountant can help you keep your business finances in order.

Working Capital

Your franchisor can help you determine the amount of working capital you need to get your business started and running through the first year or so. Depending on the business, it is important to have enough working capital to cover two or three months to as much as two to three years until the business is off the ground. While the franchisor can provide you with an estimate for the working capital needed, you should do your own research too.

Franchise Fee

In general, most franchise fees are between $20,000 and $50,000. For mobile or home-based businesses, this fee could be less than $20,000. In addition to covering the costs of training, the franchise fee also covers support and site selection. There are cases in which the franchise fee only covers the cost of having the right to use the franchise’s name.

Build-Out Costs

For a brick-and-mortar franchise store, the build-out cost can be expensive. When you’ve decided on a location and the franchise you want to purchase, the franchisor can help you calculate your overall build-out costs. This includes expenses for construction, fixtures, appliances, furniture, signage, and equipment. A benefit of having an at-home business is that there are no build-out costs.

Supplies

It depends on the business when it comes to the supplies that are needed. For example, a restaurant needs appliances, salons need sinks and beauty tools, business offices need copiers, computers, and other supplies. The franchisor should have an estimate for you in regards to how much supplies should cost.

Inventory and Overhead

If you own a retail business or sell a specific product, inventory becomes an expense. While every business is different and has different requirements, you could see costs for inventory go between $20,000 and $150,000. Last but not least, it is also important to factor utilities and payroll into your budget, as you need to keep the lights on and pay your employees.

Travel and Living Costs While Training

While training may be covered by the franchise fee, there are added costs including travel and other expenses that fall on the franchisee. The franchisor provides the franchisee with training, but as your business grows, other employees will also be required to take the training.

Royalty Fees

Another important franchise cost to consider as a franchise owner is the royalty fees that you are responsible for paying. Royalty fees are recurring payments that are usually collected by your franchisor monthly and give you the right to use their brand and operate the franchise business. When it comes to the franchisor v. franchisee relationship, royalty fees are beneficial for both parties because the franchisor makes money when the franchise owner makes money. A misconception of franchising opportunities generally is that franchisors make most of their money from the initial franchise fee, but that simply isn’t true.

Advertising Fees

Another fee that franchise owners are responsible for is the advertising fee. This fee is collected by the franchisor in order to better advertise the franchise business to the community. The franchisor usually collects monthly and calculated by a percentage of your earnings. While the average fee usually ranges between 1 to 4 percent, some franchisors charge a flat rate while others don’t charge the advertising fee at all. It can differ among franchising opportunities.

While you aren’t collecting this fee as a franchise owner, you should know that this fee is separate from the franchisor’s earnings from royalties. This franchise cost should be considered as funds collected “in trust” to market and advertise the franchise business.   

Working with a Franchise Consultant

When you’re a franchisee, there are numerous fees and expenses. Before making the decision to open a franchise, consult with experts, like franchise consultants and accountants, to make sure opening a franchise is right for you based on your skills, background, and financial situation. A franchise consultant is a professional who connects franchisors with entrepreneurs who want to open a franchise. In addition to knowing the franchise cost of many franchise businesses, the consultant can also explain the Franchise Disclosure Document (FDD) and the franchise agreement of several franchising opportunities. Think of the FDD as your guide to what you need to know about owning a franchise. 

As always, do your due diligence by looking in your market to see what franchise businesses are in demand, looking online for consulting events, and making sure your finances are in order. If a franchisor believes that you have what it takes to buy a franchise, you will be invited to the brand’s discovery day. During this event, you can ask questions to the franchisor and members of the brand’s leadership team. If after the franchisee validation process you still believe that this franchise business is the right investment for you, then go all-in.

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