Author: Vito Baxter
Putting Down Financial Roots
One of the best ways to ensure personal financial success involves buying and operating a franchise business. There are literally thousands of opportunities out there in hundreds of different disciplines, and all it takes is commitment, dedication, and cash. The question prospective franchise owners ask more than any other has to do with franchise costs. Before you can decide what sort of business to purchase, you need to know the franchise cost and exactly what it covers. While every business is different, there are enough commonalities from one franchising system to another to make some educated guesses about franchise costs.
Costs to Open a Franchise
Every company that provides franchising as a means for operating as part of its system charges a franchise fee. This upfront payment goes toward training, ongoing corporate support, and things like site selection if your business requires a storefront or some other retail type presence. A brief analysis of a broad range of franchises shows that the average franchise fee can run anywhere from $20,000 to $50,000. Generally speaking, the more prestigious the brand, the higher the franchise fee, although there are plenty of good options at the low end of that spectrum. It should be noted that most low priced franchises are mobile or home-based operations, although not all. To open a franchise, you will also need to purchase inventory and supplies, since nearly every franchise agreement stipulates the use of specific kinds of items in order to make sure that every franchise is identical. For example, the reason that hamburgers from a particular fast-food restaurant look and taste the same from Maine to Hawaii is because the parent company engages bakeries and meat suppliers from coast to coast that will provide a consistent product. Depending upon the type of franchise you buy, inventory and supplies can run anywhere from $20,000 to $150,000 before you open your doors.
Additional Franchise Costs
Legal fees are another franchise cost to be borne by anyone getting ready to open this kind of business. There are franchise documents to sign, equipment and property leases to consider, and financing terms to review. You should expect to pay a franchise attorney anywhere from $1,500 to $5,000 for his or her work. If you need a place to do business, there will be real estate construction costs for a new building, or build-out costs to remodel an existing space to fit your particular needs. No matter which of these may be necessary, prices will vary from one location to another depending upon prevailing real estate markets. The average build-out of existing space can run from $20 per square foot to more than a hundred.
Two additional categories of franchise costs round out this list. Most corporations charge a recurring royalty to its franchisees, which serves a twofold purpose. This fee, which can be as small as a few percent of a franchise's gross sales revenue to as much as 12-15 percent, is oftentimes earmarked toward national ad and marketing campaigns that benefit every franchise owner, no matter their location. It also serves as the primary revenue source for the parent company, especially if they do not operate locations of their own. The final element of the franchise cost process involves working capital. These are funds that allow start-ups to weather those early days of business, where sales are slow until a loyal customer base is developed. Most franchisors caution their franchisees that they should have at least six months of working capital on hand, and more is always better. Among the franchise costs that need to be covered here are payroll, taxes, royalties, rent, advertising, utilities, insurance, and the restocking of inventory and supplies. A good rule of thumb to follow is to set aside double your startup costs, using that extra cash (or a reliable line of credit) as a cushion against unforeseen circumstances.
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