How much does it cost to buy a franchise and license the rights to use a preexisting company’s branding and business model? It’s a question that many small-business owners ask themselves annually, with today’s most popular brands often receiving tens of thousands of applications in any given year. While many firms offer affordable up-front licensing programs, with franchise costs easily capable of compounding once you factor in myriad operating expenses, it’s important to get a handle on startup financing before buying in. Here, you’ll find a handy guide to many common franchise costs, and how much you can expect to spend getting one off the ground.
How Much Does a Franchise Cost?
First, a few caveats. While home-based or mobile operations (e.g. publishing, graphic design or tech support services) and similar ventures with low overhead can often be started for as little as $10,000-$15,000, costs can quickly multiply for more sophisticated outfits. Depending on which industry sector you choose to work in—fast food, pet care, carpet cleaning, etc.—the majority of franchises will cost around $50,000-$150,000 to get started. By contrast, auto repair and maintenance shops may require as much as $200,000-$350,000 to get up and rolling. Likewise, full-service restaurants can easily set you back between $500,000 to $1 million in up-front expenditures, while at the top end of the scale, new hotels may require $1 - $5 million to break ground on. However, be aware that these initial setup costs are simply average ranges, do not include additional operating expenses (outlined below), and vary by brand and franchisor (a.k.a. the parent company and trademark owner). Understanding how much you may have to invest in up-front franchising fees (one-time fees paid to license the franchisor’s operating system, brand, and support or training services) and ongoing franchise costs to bankroll your business is vital. In effect, it can help provide you with a more realistic picture of overall operating expenses, and which opportunities make sense to consider.
Common Franchise Costs
While franchise fees will provide you with use of a brand name, business system and marketing/management support, bear in mind that other expenses will frequently crop up, and that there are additional financial requirements to consider. For example: To ensure the health of their prospective business partners, franchisors often require franchisees to boast $30,000-$100,000 or more in liquid assets (that can easily be converted to cash) and a minimum net worth of $75,000-$500,000. Provided you are approved to open a franchise, common operating expenses you can also expect to encounter include:
Royalties: Ongoing expenses that must be paid to the parent company as franchise costs, which can frequently run between 4-10% of monthly gross sales (total sales before taxes or operating expenses are deducted). Note that some franchisors may demand fewer up-front licensing fees in exchange for a larger percentage of back-end returns, e.g. as much as 15% of gross sales plus 50% of the remaining pretax profit every month.
Real Estate and Build-Out Costs: While these expenses can vary wildly, costs to obtain a physical location (which must be franchisor-approved), install furniture and fixtures and set up equipment and signage can also be considerable. In most cases, the franchisor will own the lease on a given building, in which case you can expect to sub-license from them by way of a down payment (20-40%) and/or monthly financing. Of course, making architectural adjustments or adding decor to the facility will also cost you extra, as will paying for insurance, security and landscaping.
Inventory, Supplies and Equipment: If you’re opening a retail location, or plan to hold any kind of product in inventory, it’s not uncommon to spend an additional $25,000-$125,000 on sellable goods as well. Raw materials, cleaning supplies, and any other items you’ll need to maintain day-to-day operations and manufacture or assemble products should be planned for up front, too. Equipment costs associated with operating your business can vary to boot. While operators of home-based franchises may require only computers and software to ply their trade, franchisees operating bakeries, laundromats, janitorial firms and other high-touch ventures may need to spend considerably more on equipment.
Marketing and Advertising: Costs to promote your business vary wildly across industry and geographic locale. In some cases, part of the royalty fee you’ll pay to the franchisor helps underwrite joint promotional efforts. But in other cases, or if you wish to promote further, you’ll want to plan for promotional expenses when calculating how much it costs to run a franchise as well.
While franchise fees will provide you with use of a brand name, business system and marketing/management support, bear in mind that other expenses will frequently crop up, and that there are additional financial requirements to consider.
Salaries and Training: In addition to the above franchise costs, both you and your employees should expect to draw a regular salary from the business. However, both franchisee and employee training will be necessary too. While a franchisor may cover select training expenses for franchisees as part of its royalty agreement, take note. You may be required to pay for more advanced programs for yourself or key members of your management team, and any associated travel and living expenses if you’re required to travel off-site.
Legal, Accounting and Professional Fees: While these expenses are also variable, it’s not uncommon to spend as much as $2,000-$5,000 on attorneys, accountants and other professionals who can help you negotiate contracts, manage the books and maintain records. Architectural and engineering fees should also be factored in as well.
Working Capital: Don’t forget you’ll also need to keep a certain amount of money on-hand to pay monthly bills, especially as you wait for sales to roll in. Having extra cash around is essential in case unexpected expenses crop up, as they always seem to do.
In the end, determining how much it costs to own a franchise isn’t a simple question to answer. Doubly so once you start to add up the aforementioned costs—and factor in additional expenses like utilities, maintenance and more as well. However, thousands of savvy entrepreneurs manage to make the numbers work each year, and turn a tidy profit while they’re at it. If you’re considering joining their ranks, doing some simple planning up front can help you increase your odds of hitting it out of the park with your next franchise as well.
Photo: Getty Images
The information contained herein is for generalized informational and educational purposes only and does not constitute investment, financial, tax, legal or other professional advice on any subject matter. THIS IS NOT A SUBSTITUTE FOR PROFESSIONAL BUSINESS ADVICE. Therefore, seek such advice in connection with any specific situation, as necessary. The views and opinions of third parties expressed herein represent the opinion of the author, speaker or participant (as the case may be) and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions. American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any such opinion, advice or statement made herein.
