Aspiring business owners are often attracted to franchises because their startup costs are clearly outlined from day one.
However, depending on the type of franchise you open, these costs can range quite drastically. This is because some franchises might need specialized equipment or commercial property. Others allow you to work from home with no special licenses or equipment.
In this article, we’ll explore some of the key variables that affect total franchise costs. We’ll also discuss financing and other key items to consider before taking the plunge.
While there are many variables that impact the cost to open a franchise, the average minimum cash required across the 382 franchises we reviewed was $89,310. Of these, the lowest upfront investment was $3,999 and the highest was $750,000.
Here’s a breakdown for a few of the bigger industries:
Below we’ll look at some of the variables that impact the cost to open a franchise.
One of the fixed costs that you’ll face is the franchise fee. This is a one-time entry cost into the franchise system. You get access to the systems that the franchisor has built and receive training in marketing and management that will be ongoing throughout your franchise journey.
In a sense, the fee is the sum total of all the ups and downs, all the highs and lows, all the hard-won lessons the franchisor paid to learn about before you came on board.
In addition to the one-time franchise fee, you’ll also pay royalties, which are often between 4-8% of gross revenues along with charges for a pooled marketing and advertising fund, shared between the franchisees. This pooled method allows everyone to leverage group buying power to make their advertising dollars go further.
If the franchise fee was a charge for all the learning that a franchisor had done up until the time you entered the system, the royalties are continuing education and support.
On top of these two costs, a lot depends on whether your business can be conducted from your home and whether the franchisor imposes a net worth and/or liquidity requirement.
Much has happened recently to normalize working from home and this was a major selling point of some franchises long before the desire became mainstream. The advantages are obvious:
While many service businesses can be headquartered in your home, like a home inspection business or a P3 Cost Analysts franchise, others might at least require access to a professional location to meet clients in person, as offered in many coworking spaces.
But many businesses can’t be run from home. Restaurants, exercise and yoga studios, and electronic repair shops need commercial spaces to deliver what they are offering to their customers. Once you know you will need a commercial space, you need to consider:
Part of why some franchisors have net worth and liquidity requirements in place is precisely because of cost and time overruns. They want to make sure that franchisees have the means and patience to deal with any challenges that may come up in building out a space to welcome customers.
The franchisors are not expecting you to use all your net worth and liquidity to finish a buildout, but rather they want to know that you have a safety net in place should any delays occur.
While you always have the option of using your own assets to entirely fund the cost of opening a franchise, there’s often financing available. The five traditional aspects of your application that a bank will consider are:
As long as your answers to all these points are reasonable, you have a good chance of obtaining financing. Additionally, banks consider franchisees safer investments than a standard startup as there has been proven successful for the business model already.
Another often overlooked aspect of financing is the ability to have funds to cover your living costs. With almost any business, including franchises, it can take a minimum of one year to turn a profit. You must have your budget set to live within your means, have savings, or have additional capital for living expenses included in your financing to succeed. Most businesses fail because the business owner runs out of funds to get the business over the top. You have to have the funds and wherewithal to stick with it during the early days.
While in time you may be able to develop team members and delegate key parts of business operations to them, in the beginning, you will be in charge of many of those functions. And the more familiar you are with how a franchise runs, the better you will be able to train and manage your team members. Successful franchisees have a deep knowledge of the brand they buy into.
Owning a franchise begins long before you sign your agreement. You should read everything you can find online (both good and bad), and ask to speak with current franchisees.
A discovery day is essentially a giant show-and-tell session. Potential franchisees come to corporate headquarters where they learn about the franchisors’ systems and products while hopefully having a bit of fun and connecting with the brand. While the focus is on positive possibilities, don’t miss the chance to ask any tough questions on your mind.
Keep in mind that some franchises, like many home-based and business-to-business ones, do not have a service that can be secret shopped, and often do not have a ‘discovery day’ either, as there is no physical location to meet. With these types of franchisees, you will learn all about them from the franchise development team, and your conversations with existing franchisees.
Many franchisees have previous experiences that prepare them for franchise ownership. They may have had a successful corporate career, or they may have owned their own business before. Whatever career path franchisees walk down before franchise ownership, they are likely to have discovered their strengths and weaknesses and know what are the key areas in which they add value to any business.
Take the time to articulate these strengths yourself, but don’t be afraid to ask friends and colleagues for their input and compare what they have to say to your own self-assessment. Then apply those strengths to the franchise you are exploring in the context of the due diligence you’ve done before. Are your superpowers good fits for this franchise? Why or why not? If they aren’t, be willing to seek a better fit with another franchise.
Perhaps the most important cost to consider is your time. It’s going to take a lot of it to get a franchise up and running, and a fair amount of time to keep it running well.
The most successful franchisees often have strong reasons for building their businesses. Money is not an unimportant factor in why someone might choose to build a franchise, but it’s not sufficient in itself. You can make good money in many jobs and non-franchise businesses. People build franchises because they can experience:
Those are whys that aren’t available in a non-franchise business. While all of them are attractive, two or three are likely to be the most important to you, and you should lean into them as you pursue this opportunity.
While the average cost for starting a franchise varies, you can narrow the range of those costs by looking at net worth/liquidity requirements from a franchisor as well as whether the franchise can be run from home.
As you look at those numbers, make sure to also consider how the franchise supports its franchisees. When your skills align with a respected and supportive franchise, long-term success is possible. That’s why we provide our P3 Cost Analysts franchisees with access to world-class training, expertise, and business resources. Our support alongside relatively low start-up costs has been a vehicle for profitability for many aspiring franchise owners.
To learn more about starting a cost reduction consulting franchise with P3 Cost Analysts, contact us today!