The Costs Associated with Franchising
Before entering into any business venture, it is important to have a clear picture of the associated costs that you’ll encounter during the start-up phase and throughout the life of your business. Unfortunately, opening a business in any industry has an element of unpredictability. Unforeseen costs pop up regularly, making it challenging to accurately predict expenses. As a result, many aspiring entrepreneurs turn to franchising as an excellent alternative to business ownership with less uncertainty and perceived risk.
Since the franchising game began with the Singer brand in the mid-1800s, entrepreneurs have recognized the opportunity that franchising presents: the ability to own your own business with the strength of an established brand and corporate support behind you. On top of that, franchising gives entrepreneurs the ability to have an outline of the costs they’ll encounter before even making the decision to move forward with investing in a franchise business. Franchises companies are actually required to disclose approximate costs to prospective franchisees, so they’re able to run the numbers before taking plunge. As you review the disclosure document, here are the most common franchise costs you’ll come across:
- Franchise Fee: The large majority of franchises require the franchisees pay a one-time entry fee to buy into the franchise and brand. This cost will vary franchise to franchise and industry to industry. The average initial franchise fee for a single unit falls somewhere between $20,000 to $35,000, but you may encounter fees greater than $100,000 or even less than $10,000 depending on the business. You should also factor in the legal fees that will come along with having an attorney review the franchise documents with you.
- Royalty Fees: Throughout the life of your business, you’ll be required to pay a percentage of your sales back to the franchisor in exchange for things like continued use of the brand and corporate support. Again, these ongoing fees will vary by industry and by franchise. The percentage will be disclosed in the franchise disclosure document.
- Marketing Fees: On top of the monthly royalty fees, some franchise businesses will also retain a percentage of sales to put towards a national marketing fund. In some instances this may be presented as a flat monthly fee rather than a percentage of sales. Franchises will designate the use of these funds, whether they’ll go towards large-scale marketing efforts or stay on a more local level. The marketing fees generally range from 2 to 5%, but again will vary by industry and by franchise.
- Other Costs: Depending on the franchise, new franchisees may also be required to purchase products or services from the franchisor. Any of these costs should be included and identified in the disclosure document.
While these are by no means every cost you’ll encounter with franchising, these are the most common to account for in a business plan. Before making the decision to invest in a franchise, it’s also a good idea to talk with other franchisees about their experience with the business. If they are willing to share, their experience may help you get a better idea of when you may expect to hit a positive revenue stream.
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