Asking how much a franchise costs is like asking how much a car costs. It depends upon the brand, this system behind it, how you negotiate, and what financing is available to you. The answer: franchise costs are all over the map.
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There are some franchises you can start in your living room for less money than is in your bank account right now. There are others that may cost an exorbitant sum — think about setting up a hotel franchise, for example.
Therefore, in order to understand how much a franchise costs, you have to understand the components that go into determining that cost. This is what we’ll be exploring below.
Sure, you may have spoken to some franchisees that don’t keep lawyers on retainer, and they say it’s all good, but do you really believe them? As a businessperson, you need to have a lawyer, especially when it comes to evaluating the Franchise Disclosure Document (FDD) that you’ll be presented with, and handling all of the contracts that you’ll be signing. Having a franchise lawyer on hand is a savvy investment; don’t overlook it.
The Franchise Fee
This cost may be the most obvious one, because it’s almost always consistent from franchisee to franchisee, regardless of circumstance. Generally speaking, this fee will range from $20,000 to $50,000, but it could be higher or lower depending upon the kind of business. This fee is designed to cover a number of different things, from initial setup support and training to possibly even marketing support. Are you getting what you pay for?
Here, the costs can vary widely. It all depends upon what you need to get your franchise off of the ground. Do you need to lease or purchase commercial or office space? Is there specialty equipment that’s required to get up and running? You’ll have to do your homework in order to determine what precisely your initial investment will entail.
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It costs money to keep the lights on, the air conditioning functioning, and the Internet turned on. Also, it costs money to keep your inventory levels where they should be, and to deal with all of the other incidental things that go into running a business. Here, it’s useful to speak with other franchisees to get a sense of what these costs look like.
Cash On Hand
Every business needs a rainy-day fund, pure and simple. Again, you may wish to consult with other franchisees to get a sense of how much liquid capital you should have on hand while running your business. Remember that this can play into your exit strategy (which you absolutely should have!).
Depending upon the franchise, there may be monthly or yearly fees you’ll be responsible for. It’s possible you may have to pay for ongoing marketing support. The FDD mentioned earlier is an excellent guide for determining what fees (and royalties) you will be responsible for.
Full Understanding Is Critical
As a prospective franchisee, you have to understand the full cost of running the franchise you choose. So, make sure that you’re prepared with complete information for all of the above categories. If it’s right, then it’s right; if it’s too rich for your blood, then don’t pull the trigger!