Aspiring franchisees looking for time freedom and flexibility often face a host of questions regarding the cost of entering the franchise world. Expenses for business start-ups, franchise fees, royalties, and more can add up quickly, while different information presented in different formats can make understanding the questions around franchising cost even more intimidating. To those potential franchisees, the International Franchise Professionals Group (IFPG) – a membership-based franchise consulting network – provides answers and guidance.
Franchise start-up costs vary depending on many factors, such as the type of franchise, the franchisor agreement and the location of the business. That said, the process for any potential franchisee should typically start by getting a basic understanding of how much the total franchise cost is. Then, it’s time to begin asking the right questions to get a better sense of the actual cost.
What are the Minimum Capital and Money Requirements?
Generally speaking, franchisors have a minimum capital requirement; this is the amount of money a potential franchisee will need to sign the franchise agreement. This amount often covers franchise fees, the cost to open and equip the franchise location, and working capital. How much a franchisor requires for initial investment can range from $25,000 to $250,000 or more. Also, franchisors may require additional funds to cover ongoing expenses and royalty payments. It’s important to ask the franchisor detailed questions about all franchise-related costs to determine the actual investment necessary to open and run the business.
What are Typical Franchise Fees?
Franchise fees are money paid to the franchisor in exchange for use of the trademark, brand, and business system. Each franchisor sets their own franchise fees, though many require a one-time lump sum payment when the franchise agreement is signed. Some franchisors also charge monthly or annual fees as part of the franchise agreement, which franchisees must pay to remain part of the system.
What are Royalty Fees?
A royalty fee is paid to the franchisor on a regular basis, typically as a percentage of gross sales. These fees are used to cover the cost of ongoing support services provided to franchisees. Royalty fees also help the franchisor fund ongoing marketing and advertising efforts for the brand. Royalty fees often range from four percent to nine percent of gross sales, as determined in the franchise agreement.
Are There Other Fees?
In some cases, franchisors will charge additional fees on top of franchise fees and royalties. This may include training fees, marketing fees, an audit fee, technology fees, or other fees associated with specific products, services, or programs offered by the franchisor. Depending on the brand, these fees can add cost to the initial investment amount and ongoing costs to the franchise.
Are There Any Other Industry Considerations?
It’s important for potential franchisees to understand the territory-related costs and regulations for the state in which they are planning to open and operate their franchise. For example, some states require a franchisee to pay a personal income tax when receiving proceeds from the franchise systems. It’s also important to understand the industry rules and regulations associated with the location. Additionally, if the franchisee is planning to purchase real estate, many states require the franchisor to provide disclosure documents, including proposed and finalized lease documents, prior to closing the deal. It is essential to be familiar with these costs prior to launching a franchise.
Every franchise situation is unique, and there are many factors that affect the franchising cost. It’s important to do research and explore all the possible scenarios to make sure you’ll be able to decide if franchising is right for you. The IFPG can connect you with franchising experts who can guide you through the process, so you can better understand the costs and make an informed decision.