One of the most common sayings in any financial talk is “you need to spend money to make money,” which is very accurate. However, what makes this saying a little different for most people is the amount of money they have to spend to make money, especially in the franchise business. The cost of opening a franchise does differ depending on the type of franchise you want to get involved in.
Some people may spend hundreds of dollars while others millions while starting in the franchise industry. While the cost may be different, every franchisee must incur standard costs no matter the business.
These costs include:
Franchise Fee
The first thing you have to remember when opening any franchise business is that you are renting a brand. The franchise has built the brand from scratch, thus making it easier for your business to get recognition. You also get support to grow your business.
However, you have to pay for the privileges that come with being associated with the franchise name. Depending on the franchise, you can pay as little as $20,000 to as much as 50,000 and above. The amount you pay depends on whether you have enough capital to get your franchise up and running.
For instance, a franchise that needs you to build in a particular location will cost you more than a home-based or mobile franchise.
The fee you pay covers the cost of site selection support and training, which is why you pay a higher fee for a franchise business that requires a physical location. It’s important to note that the fee covered may differ for every franchise business.
Some may require the fee to cater to your license, so make sure you do your research beforehand to determine what your franchise fee covers.
Working Capital
Your business needs capital to operate daily. So, before you start your business, you must have enough money to cater for everything you need to run your business successfully. The amount you set aside for your working capital should be enough to sustain your business before it starts generating sufficient revenue.
Most franchise businesses estimate the working capital needed to run the business successfully. Also, make sure you do your research, as you wouldn’t want to come in blindly. One way to do research is by talking to other franchisees.
Accounting and Legal Fees
Most people often overrule the importance of hiring an accountant and lawyer when purchasing a franchise. They, however, play a crucial role in the successful set-up of your franchise business. While the fee costs will be entirely on you, hiring them is well worth it.
Your attorney will help you review your franchise disclosure document and ensure that everything on the agreement is fair. The accountant you hire will help you set up your records and books for the company immediately after purchasing the franchise.
It is advisable to seek help from an expert to determine how much working capital you may require to set up and run the business successfully.
Build-Out Costs
Apart from having a location, your business will also require furniture, signs, equipment, fixtures, and other items to run successfully. All these requirements cost money. Also, let’s not forget zoning compliance fees, architectural drawings, contractor fees, landscaping, and insurance.
Most franchisors will give you a rough estimate of all your build-out costs. However, these costs will vary depending on your franchise.
Inventory
If you purchase a franchise that sells products or retail, you will require inventory. It’s important to note that your inventory cost will vary depending on the franchise business. But, you can ask your franchisor for an estimate if you aren’t quite sure of the inventory costs.
Supplies
There are several things you will require to run your business. For instance, if you are opening a restaurant franchise, then you will need food, napkins, plates, and cutlery to operate. Another franchise will require something different to operate.
For this, your franchisor will provide you with an estimate or list of what you need to operate your franchise successfully.
Living and Travelling Expenses
Before you can even open your franchise business, your franchisor has to show you how everything gets done. This happens during training. Most franchisors need the franchisee and at least one employee to attend the training.
And while your franchise fee covers training, you will still need to look for accommodation and pay for your traveling expenses.
So, before you sign any documents, make sure that your finances are in check.
