How Much Does A Franchise Business Cost?

Posted on December 24, 2008 by Ginger Watford

Stepping out and taking hold of a business opportunity as a franchise owner is never a comfortable task. No matter how excited a person can be about the prospect of owning his own business, there is always some degree of trepidation at what all it is actually going to entail. Particularly if you’ve never purchased a franchise business before, there are certain aspects of purchase and operation that should rightfully draw some questions from you, not the least of which being the price.

Unfortunately though, pricing on franchises is not a simple matter. For starters, there is a huge cost discrepancy between the initial costs of high-end and low-end franchises. Then, depending on what a given franchise actually does, there are different kinds of costs that can apply to one kind of business and not another. Because that’s a rather vague overview of the confusions surrounding the purchase price of a franchise, the following is a piece-by-piece analysis of what costs exist and what costs to look out for when buying a franchise.

Upfront Expenses
When the average newcomer to franchising approaches a purchase and asks how much a franchise costs, this is most likely what he’s asking about: the amount of money it’s going to cost him just to start. This is broken down into three primary parts of the cost: the franchise fee, startup costs, and available funds.

The franchise fee is conceivably the most straightforward aspect of the whole transaction. It’s the fee you pay to gain the rights to use the name, logo, and business model of the franchise. Generally, this number hovers in the range of $10,000-$50,000, depending on the franchisor.

Startup costs have the most variance among the three parts of the initial cost of a franchise: ranging anywhere from $1000 or less up to millions, depending on the kind of business opportunity in question. Low cost franchises like American Business Systems, a home business providing cheap and efficient medical billing services, can cost as low as a few thousand dollars to get underway, simply because there is no store to build, no inventory to buy, and little equipment necessary. Home businesses, consultancies, vending operations, and web-based businesses all tend to fall on this cheaper end of the spectrum. On the other end of the gamut, high capital franchises like STAR KIDS Early Learning Center can carry a startup cost upwards of $3mil to cover the cost of site selection and purchase, construction, employee hiring, training, and tons of equipment. Other businesses that fall into this high price range are hotels and fast food restaurants, with auto repair and retail establishments following not too far behind. Other costs included in the startup operational expenses are often professional fees, insurance costs, and the cost of any necessary operating licenses.

Finally, the third piece of the initial cost of a franchise is the franchisee’s available funds for working capital. Some franchisors require that a new buyer have a certain amount of available cash on hand to ensure that the business has something to fall back on if it isn’t quite as instantly successful as hoped. This amount may be enough to keep the business running for just 3 months or as much as 3 years, depending on what the franchisor requires.

Ongoing Expenses
Something never to forget is the ongoing cost of operating a business, because spending doesn’t stop when the front doors open, rather it’s just begun. So when you purchase a franchise, be sure to calculate in all that you’re likely to be paying throughout the life of your new operation.

First, there are still fees to pay to the franchisor after you become a franchisee. The most common is a royalty fee, which is generally a percentage of franchise’s earnings, somewhere around 6%. However, not all franchises charge on ongoing royalty, like Candy Bouquet, the creative retailer of candy gifts which has no royalty fees to pay, so it’s important to ask whether or not the business that you’re interested in does.

Sometimes, the franchisor charges an ongoing advertising fee as well, to help afford a pre-existent and ongoing local and national advertising campaign. If this is an included fee, it can be collected either independently or as part of the general royalty fees, so whether you see a listed advertising cost or not, it’s important to ask if there is one and what it costs.

Aside from regular fees owed to the company, there are also plenty of ongoing expenses that are natural to any kind of business, franchise or not. Some of those basic expenditures cover things like inventory, equipment, rent, décor, equipment and store maintenance, payroll, employee benefits, and various types of insurance. Most of these generally don’t pertain to home based business, but in any operation with a storefront, such costs are to be expected and entirely necessary. If your franchisor, or perhaps another franchisee, can give you an estimate on monthly expenses, it will go a long way in helping you determine which franchise is best for you.

Counting the Cost
Whether you’re interested in a work from home opportunity or a full-service hotel, knowing what you’re going to be paying at the beginning is important to the success of your business and to your personal peace of mind. Do all your research, pose all pertinent questions, and don’t get reeled in by fine-sounding rhetoric; know what you want and what you want to spend for it, and then stick to it.