How Much Does a Franchise Cost?
By Denise T. Davis

How much does a franchise cost? Of course the cost of obtaining and starting a franchise depends on several variables. For instance, the type of industry, size and location are some of the differentiating factors. However, there are some basics that you could keep in mind if you are contemplating becoming a franchisee.

First of all, you will usually have to pay a franchise fee, which averages somewhere between $20,000 and $30,000. However, the fee could be less than $10,000 for businesses such as mobile and home-based businesses, or in some cases could possibly cost $100,000 or more. A few examples of these more expensive franchises include building maintenance businesses and some types of athletic training facilities.

Since you are gaining the advantage of taking part in an already recognizable business name, and usually ongoing support from the franchisor as well, franchisors typically stipulate that a potential franchisee meet other financial requirements. A predetermined amount of readily available funds that are not borrowed is usually a necessity as well as a certain net worth. In order to pay for ongoing expenses that are not covered by revenue you will also need a guaranteed amount of working capital. Depending on the type of business, it is important that the working capital cover a particular length of time, ranging from a few months to possibly two to three years until the business is in full swing. The franchisor typically provides an estimate of the amount needed.

Besides the franchise fee, other up front costs could include professional fees such as legal and accounting services, insurance, and operating licenses. Employee training, inventory, and equipment are usually part of the startup as well. Also plan on, rent and possible leasehold improvements, and other costs involved in setting up a retail location including the purchase of fixtures, signs, and landscaping. You may also incur grand opening and initial promotional expense to get the business going.

Keep in mind that many times a higher initial investment does not necessarily mean a higher return. Often times franchises can be started with a total initial investment of less than $200,000 and sometimes even less than $50,000. Some home-based business such as handyman franchises and marketing franchises provide a decent return with little up front cash.

Ongoing, you will need to be prepared to continuously pay royalties to your franchisor, possibly 4 to 6 percent of your revenue. Also, insurance (liability and health), inventory, and equipment maintenance would be continuous expenses. Of course, there will be employee salary and benefits. Additionally, you may be required to pay into a national advertising fund.

Before making a decision on a franchise, it is important to obtain from the franchisor a copy of the Uniform Franchise Offering Circular (UFOC), also known as the disclosure document. The up front fees are outlined in this circular. The document should describe the initial fee which may be non-refundable as well as the other startup costs. If there are any items that you believe might be a startup costs that are not mentioned in the disclosure, be sure to ask about them.

All in all, you want to be sure your financial situation will cover expenses for you and your family during the time it takes to get the business up and running. This may take several months or a bit longer than that. Keep mind your operating expenses as well as personal expenses for the first year or two in business. In order to have the best chance of success with a franchise, it is recommended you contact a franchise consultant to discuss your goals and finances.

How Much Money Can Your Franchise Make?

Why Does a Franchisor Exclude This Information?

Section 19 of the UFOC is sometimes referred to as an earnings claim: the earnings a franchisor projects for a franchise of your size, type, and location based on previous outlets already doing business. Unfortunately, you may never see this information because most franchisors don’t disclose it. In fact, they are protected by law to retain this option.

There are two reasons for the exclusion: first, there is no possible way to predict how well any one franchise can do over another, regardless of other franchise successes. A franchisee will likely take these facts to heart, pursue the opportunity, then begin to retaliate should these figures not come to fruition. Secondly, earnings claims will include financial gains and losses and people new to the business world have a difficult time understanding anything to do with “loss.”

Therefore, by keeping the earnings claim portion out, franchisors are less likely to lose a franchisee candidate during the early stages of the franchising process.

But, that doesn’t mean they won’t show you some actual income statements from existing outlets. If you’re lucky to get some samplings, it will happen later in the process, at the point where the franchisor senses your willingness to move forward.

Befriend a Few Franchisees and They May Open the Books

If you are conducting your due diligence during the process, you will eventually find yourself contacting a number of franchisees to get their side of the franchising story. You will want to talk to franchisees that have been in the business for at least three years.

You will not want jump into money matters right away during your franchisee interview. Remember, if this person has been operating for at least three years, something is going right – or not. In any case, your line of questioning should get you the answers you’re looking for.

What you have to keep in mind is that every person you meet at one point was in your position as a prospect. If your approach is subtle and enquiring, expect to receive a lot of good, honest feedback, especially if the franchisee is doing well. Success has a way of making people talk about their accomplishments.

The Back Door Approach to Getting the Numbers

If getting cold hard figures doesn’t seem possible, you will have to take another approach to determining if the franchise opportunity will make you money. While talking to franchisees, ask these questions and look for the answers, in brackets below:

1) How long have you been in business?
(At least three years)

2) How long did it take you to get comfortable with your franchise?
(Three months)

3) Has your business been growing year by year?
(Yes)

4) How long before your business broke even each month?
(No more than 18)

5) Are you getting the support you were promised from the franchisor?
(Yes)

6) Do you see yourself in this business over the next 5 to 10 years? If no, why?
(Yes)

7) Is your annual salary after all these years where you’d expected it to be?
(Yes)

If you ask these questions in the sequence outlined and take the responses from at least five franchisees, you should have a very good idea if your investment in the franchise will yield you a revenue you will be satisfied with.

How Safe is Franchising?

Owning a franchise makes you an entrepreneur, a small business owner. While no guarantees can be made in any business venture, franchising is one of the safest investments you can make to succeed as a small business owner.

Determining the level of safety among the handful of franchise opportunities you may be interested in can vary. Mega chains like Subway have a proven track record of success; smaller systems on the other hand may not have the same level of consistent success. Of course, there is never a guarantee you will succeed as a franchisee, regardless of the size of the concept.

There are a number of ways you can assist yourself in making the best decision when it comes to investment safety:

Expansion Rate: How quickly is the franchisor growing? Steady growth year after year is a good sign that the franchisor’s management team has developed a strategic growth plan. If the system is less than five years old, make a note of how many franchises have been opened during this time frame. High fluctuations year after year can be an indicating of unstable operations.

Geographical Coverage: Is the franchisor growing locally, regionally, nationally, or internationally? Geographical expansion should only be taking place after the franchisor has established a solid base of franchises central to its head office operations.

Franchise Closings or Resales: How many franchises have closed or been resold in the last five to seven years? While there is no formula to determine the safety of a franchise based on the ratio of openings to closings (or resales), you should track how many original franchisees have shut their doors or sold their business year after year. You will find this information in the UFOC.

Franchisor Financials: When you receive your franchise agreement you will also get the franchisor’s financial statements. Your accountant can help you determine the financial stability of the franchisor. The balance sheet is a key document in this package of financials. If the franchisor is a public company, you can do your own research online, reading any of the published press releases that have been made available.

Justified Fees: When comparing similar franchise opportunities, you should examine the franchise-related fees levied by the franchisor such as the initial franchise fee, royalties, and advertising fund. You should never base your decision to buy on the franchise opportunity with the lowest fees but you should question if there are excessive discrepancies. A franchisor with very low fees compared to a competitor requires further investigation.

3 Things To Consider Before Starting Your Own Franchise
By James Hunaban 

Even though you may be plenty excited to start your own franchise business there are a lot of things that need to be considered before you do! Franchise investments can be a great thing for many different types of business people and if you are the entrepreneurial type then a franchise may be the perfect solution to starting your own business. However, if you have tried to set up your own franchise in the past and actually failed then perhaps it isn't the company's fault but perhaps you should have done some fore-thinking about the franchise. But if this is your second time setting up a franchise, or even if it's your first, here are some very important considerations that you must think about before approaching a company about acquiring a franchise:

The Market around You

The first and foremost issue that you'll want to be concerned is the market around you and where you live. One question to ask yourself before you get started is whether or not there actually is any type of market for your franchise where you live. You may be someone that wants a particular product or service, but if there are no other consumers around the living space that you are in then chances are that your franchise will be doomed from the start. Making sure there is a need, want, or market for the area that you'll be moving into is crucial to having a successful franchise business!

The Competition

Another issue that you'll inevitably need to think about is all the competition that you have along the way down the starting point. It's possible that you may not have to worry about competition if you are offering another unique type of product or service that no one else is offering, but chances are that you'll have some type of competition no matter how fierce it is. On the other hand, though, you want to make sure that your franchise won't be setup in a literal price war zone or else you'll probably have to keep lowering and raising your prices just because another retail seller does!

Growth Potential

Being successful with a franchise is something that many people would like to be, however, one consideration of starting a company's franchise is your growth potential. Is the retail store or other item you are pushing always going to be in great demand or is the market slowly dying for it? One example of a trend that didn't last for very long is the Ty Beanie Baby craze. Even though there was a market for these products in the beginning, the demand for the toys slowly dropped until they were not popular anymore!

These franchise fore-thinking considerations are very important to not bombing out within your first year. Even though it may seem like your business will never get off the ground, if your company truly has a unique product then you don't need to be worried about anything at all!

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