Becoming a business owner is a big step, and it’s one most Americans have thought about doing at some point in their life. In fact, 63% of twenty-somethings have though about it according to Inc.com. But it’s actually much harder to start a business when at a young age. Things like experience and funding are necessary components of a business, and those both come with age.
That’s why we find the majority of businesses started are from those over the age of 40. But funding and fear of failure are still major factors holding many people back from starting their own business. And that’s why people should be considering buying a franchise.
A franchise comes with a lower risk profile than a traditional startup. The franchisee benefits from the proven systems of the franchisor and creates a better opportunity for success.
But franchises come with a cost, and anyone wondering about franchising, is undoubtedly curious about how much it costs to buy a franchise?
The answer to that question is there is a very large variation depending on the franchise. You might pay $10,000 for a franchise with low overhead and no need for a physical location. At the same time, you can pay multiple millions of dollars for larger franchises that require a lot of physical build-out.
So what you need to understand is what goes into the cost of buying a franchise. Let’s explore the key components of a buying a franchise.
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Franchise Fee
The first variable in the cost of buying a franchise is the franchise fee. This is a one-time payment that allows you to become a franchisee. It ranges from $10,000 to $50,000 with the average being around $20,000.
Advertising Fee
Many franchisors charge a monthly or annual fee to have access to their franchisees for marketing purposes. For example, a pizza shop may want to target customers within a 20 mile radius of your store every month.
So they might charge a fee of $200 a month to give you access to that service. These fees vary across different franchisors and franchises but can be as low as $50 per month all the way up to $500/month.
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Royalty Fee
The next cost of buying a franchise is not an upfront cost, but still, one you should understand.
The royalty fee is a recurring payment that you will likely need to make (paid quarterly). This is a percentage of your sales that you’ll need to pay to the franchisor each month. It usually ranges from 4% to 8%, but it can be higher or lower depending on the franchise.
Regardless, you will pay this fee for the duration of the time you own the franchise. The royalty fee is the main mechanism for the franchisor to make money.
Startup Costs
Initial Inventory Costs
Many franchisees are required to buy all their inventory from authorized suppliers of that franchisor. The supplier will sell you items at a lower rate because they know that the franchisee must only buy from them. This is usually accounted for in your first month’s payment, but sometimes this cost is lumped into the total initial fee.
Location Costs
Before you open up shop, there are costs associated with finding and securing a location. You’ll need to pay rent for this location plus any build-out needed to make it work as a business. These costs tend to range between $20,000 – $100,000 depending on the size of the location and what type of business you’re opening.
Appliances and Furniture
You’re going to need appliances and furniture inside your location before it becomes a shop. This is usually the biggest initial cost for new franchisees – so don’t skimp out on good equipment. Things like refrigerators, ovens, tables and chairs all add up quickly.
Other Startup Costs
There may be additional startup costs you will find as you explore specific opportunities. These costs will become clear as you meet with the franchisor. Another benefit of buying a franchise is that the franchisor should have a good handle on your startup costs. If they don’t, then it’s time to consider a different franchise.
Contingency Funds
When it comes to calculating the cost of buying a franchise, you need to factor in contingency. This is something many entrepreneurs forget to budget for, but you should always include some contingency regardless of the business type!
First, you should plan on at least six months of contingency funds to ensure you have time to get the franchise profitable.
While franchises typically have a proven revenue model, as with any business, it can take some time for customers to find you and start buying. You need to plan for that ramp-up time. So think about those needs while calculating your personal investment and any financing you may take out.
You also need contingency funds to handle unanticipated expenses that could arise between opening day and making the first sale. For example, what if there’s a major storm that damages your roof? Or one of your key suppliers goes out of business suddenly? These things cost money, and you should be prepared to deal with them.
Professional Fees
You should factor in professional fees for services like attorneys and accountants. As with any business, you’ll want someone who knows what they’re doing to review documents.
If you’re using a franchise consultant, they will likely have providers they can put you in contact with. If not, find someone with experience in the franchising world as they will know the right questions to ask for this type of business.
Time is Money
Do not forget to account for your time when calculating the cost to buy a franchise. You will have to spend considerable time getting your franchise up and running. You need to pay special attention to this cost if you will be taken away from another money-making job or business.
After the initial startup is complete, there are different models people will use to manage their franchise. You may decide to both own and operate your franchise on a full-time basis. This will mean you are spending the bulk of time as an operator and manager and you should be paid accordingly.
You may also opt to have someone else manage the franchise full or part-time. This might be the case if you are buying the franchise as a diversification strategy, but plan to continue working or running another business.
Whatever your ultimate plan, make sure you account for your time. That includes unpaid time during the startup process, and then the time you will spend managing the franchise operations.
The Bottom Line
The thought buying a franchise can be daunting given the number of choices in today’s world of franchising. Not to mention the cost to buy a franchise is a concern for many exploring the option.
But for those who have ample savings and willing to take on moderate risk, a franchise is a great opportunity. While costs do exist as with any business opportunity, a franchise mitigates a portion of that risk.
The costs you will incur have been vetted by the franchisor, and most likely many other franchisees. Take your time during the process to speak with multiple franchisees who can verify the expected costs and how long it will take to get to revenue.
By taking these steps, and having an understanding of the required costs, you can greatly improve the chances of success regardless of the franchise you decide to purchase.
