So, you want to own a franchise but are wondering what franchise investment you need to make. Like all things in life, you have to pay a price for owning a franchise – remember, there is no free lunch.
The price tags for franchises vary depending on the type of business you choose, with mobile and home-based business franchises being the most affordable category. Here are some indicative costs:
- hotel franchises: $4 million to $6 million
- full-service restaurants: $700,000 to $3.5 million
- fast food restaurants: $250,000 to $1 million
- auto repair: $200,000 to $300,000
There are different types of costs involved in owning a franchise. While some of these costs are typical expenses that you would expect to pay in any small business, there are other franchise investments you will need to make. This is the price to be paid for the added value a franchise presumably brings to your business venture.
You will incur both initial and ongoing costs. The initial or upfront costs include:
1) Front-end franchise fees: You will have to pay an upfront fee for any franchise that you choose. This fee can range from $5,000 to $50,000 or more. In exchange for this fee, you receive the right to use the franchiser name and business concept. In most cases, you also receive a certain amount of training from the franchiser.
2) Initial investment: Apart from the franchise fee, you will need to have some amount of money readily available to you to meet your initial setup and working capital expenses. Depending on your business, you may need as little as two to three months worth or as much as two to three years’ requirement of working capital. You can get an estimate from the franchiser as to how much this amount should be.
3) Other expenses: You will have to pay professional fees for legal services and operating licenses. Things like insurance, employee training, inventory, rental and equipment will also cost money. Depending on the franchise, you may also have to pay up advertising costs upfront and buy signage packages from the franchisor.
The ongoing expenses include:
Royalty Fees: In addition to the upfront franchise fee, many franchisers also require an ongoing royalty fee. This fee is assessed on a percentage basis and usually ranges from 5% to 10%. In return for the royalty fee, you are entitled to participation in national marketing campaigns, ongoing training and territory rights.
Other expenses: Apart from the royalty fee, you will also incur regular ongoing expenses on advertising, equipment maintenance, employee salaries, insurance and inventory.
It is better to be prepared with complete knowledge before you take the plunge. Before you make the decision to buy into a franchise, make sure you have a thorough understanding of the total the franchise investment you need to make.