Franchise Startup Costs An Aspiring Entrepreneur Should Know

Before signing the franchise agreement, ensure you understand the financial requirements of buying a franchise. It is necessary to evaluate all financial aspects to decide the best franchise option for you. Fortunately, franchising does not always mean you have to invest a million bucks. Below are the description of franchise startup costs as commonly stated in Item 7 of the Franchise Disclosure Document (FDD).

1. Franchise Fee 

This is the initial fee paid to the mother company for the right to use its brand and operating system. Depending on the industry, the cost can range from a few thousand dollars to a hundred or more. The franchise fee is paid when signing the franchise agreement. Often, the fee is refundable once the franchisee completes the franchisor’s training program.

2. Real Estate and Leasehold Improvements

If you need to lease or purchase a physical location, you’ll need to consider the cost of rent or mortgage payments. Likewise, you need to factor in any necessary renovations to the space. The franchisor and the franchisee discuss the office requirements to determine if any improvements are needed. The money required would not be paid to the franchisor but to the person providing leasehold improvements.

3. Equipment and Inventory

Depending on the type of franchise, you may need to purchase equipment, supplies, and inventory to get started. This can range from kitchen appliances and utensils for a restaurant franchise to fitness equipment for a gym franchise. The financial obligations covered by these resources are generally not paid to the franchisor. The money would go to the furniture, equipment, and supplies providers. 

4. Marketing and Advertising

Franchisees must contribute to a marketing and advertising fund to promote the brand and attract customers. This money could be paid to the franchisor if the franchisor is providing advertising, marketing, or public relations. Or in other situations, the funds may be paid directly to a media company or agency handling the campaign. Note that the marketing and advertising costs are not refundable.

5. Training Expense

Training is one of the most critical elements of a franchise business. Some training sessions last several days, while others, depending on the company’s complexity, require several weeks. Many franchisors provide initial training for franchisees and ongoing support throughout the franchise agreement. This may be included in the franchise fee. However, additional expenses, such as transportation to/from training, lodging, and meals, may be paid separately.

6. Legal and Accounting Fees

Legal and accounting fees are essential when starting a franchise because of the legal and financial complexities involved in franchising. The legal fee would cover the complex legal documents detailing the franchise relationship’s terms. Accountants may be hired to help them understand the financial aspects of the agreement, like the initial investment, ongoing fees, and revenue projections.

7. Insurance and other Operating Expenses

As a franchisee, you must consider the cost of insurance, utilities, and other operating expenses to keep your franchise business running. They can have a tremendous impact on the franchisee’s bottom line. Experts suggest that you prepare funds that will last for three months. 

Franchisors worry about their franchisees’ sustaining abilities while getting the business off the ground. Good franchisors review their franchisees’ living requirements before selling a franchise and advise the franchisee appropriately, depending on the circumstances. If the new franchise business won’t generate funds that the franchisee can take home to spend during the first 90 days, the franchisor wants to be sure the franchisee can afford to survive.

Financing Options 

Franchise startup costs vary but financing options exist for every price point. You can consider the following options:

• Crowdfunding or borrowing from a friend or family member. 
• Traditional commercial bank loans, or the franchisor
• The Small Business Administration also may have funds available to help with financing.

While it is important to decide on the total initial startup costs, you must also evaluate the recurring fees and expenses. Researching and reading a company’s FDD is vital, and reaching out with any questions. A good franchisor will appreciate your diligence and work to answer your questions and address any concerns.

The financial aspects of buying a franchise require much thought and consideration. With research and honest reflection, you will find the ideal franchising partner.

Conclusion 

Keep in mind that franchise startup costs vary widely. If you need to buy the inventory, add a few more thousand dollars to the initial expenses. Or if you need to pay leasehold improvements for a new restaurant, or your franchise requires a large office with specific computer equipment, plus indoor and outdoor branding, you could add more to your costs. Paying a long-term lease or building a building is even more costly.

Generally, you’ll pay less for franchises that you can operate from home or a small office. Reduction in the total investment cost may be proper for franchises that you must run from the shopping mall, a strip center, or a stand-alone building.