Franchise costs are typically well documented, but each franchise has different cost structures. If you were to start a business on your own, you’d have to guess on your costs. With a franchise, you know the costs of developing the business, start with predefined sources for equipment and suppliers, and get estimates on the working capital you will need to run the business — all based on other franchisees’ experiences.
But like the saying goes, nothing in life is free. Like everything else, franchises come with a price.
There are many different types of costs involved with owning a franchise. Some of these costs are typical expenses that you would expect to pay in any small business regardless of whether or not your business is a franchise. Other costs, however, are unique to franchises. They are expenses related to the added value the franchise presumably brings to your business venture.
If you are considering buying a franchise, here are some the costs you can expect to incur along the way:
FRONT -END FRANCHISE FEES
Regardless of the type of franchise you decide to buy into, you can expect to pay an upfront franchise fee. This fee is usually substantial and can range from $5,000 to $50,000 or more. In exchange for this fee, you receive the right to use the franchisor’s name and business concept. In most cases, you also receive a certain amount of training from the franchisor.
ONGOING ROYALTY FEES
In addition to the upfront franchise fee, many franchisors also require an ongoing royalty fee. This fee is assessed on a percentage basis and usually ranges around 5% or 10%. In return for paying the royalty fees, you receive the benefits associated with national marketing campaigns, ongoing training, and territory rights.
REAL ESTATE COSTS
Just like any other business, you’ll need to either buy or rent space for your franchise. The franchisor does not typically provide you with space even though some franchise agreements require facility approval by the franchisor. Often, franchisors will help you find a space that is right for your franchise and they will assist you in retrofitting it to accommodate your operating needs. Even so, at the end of the day the responsibility for finding and paying for space is going to fall on you.
INVENTORY AND EQUIPMENT
Some other expenses you need to consider are the costs associated with inventory and equipment purchases. New franchises buy their equipment and supplies either directly from the franchisor or from suppliers contracted through the franchisor. This can be a big help to new business owners because it provides a reliable supply chain capable of providing materials that have been proven effective in similar operations. Still, the cost of these materials is going to land on your doorstep they are usually not included in the upfront franchise fee.
OTHER COSTS
The other costs you can expect to pay vary widely from one franchise to another. Obviously you are going to pay normal operating costs like payroll and utilities. But in addition to typical operating expenses, some franchisors include the cost of advertising in the royalty fees and some require an additional contribution for advertising. Some franchises permit franchise owners to erect their own signs while others have a sign package that franchisees are required to purchase. Before you decide to buy into a franchise, make sure you understand the franchise agreement and have a thorough understanding of all the costs of ownership.