How much money do you need to open a franchise business

business money

Franchising comes with a myriad of terms related to costs and fees. Like any new venture, you’ll encounter one-time startup expenses as well as ongoing costs that are crucial to understand as you launch and grow your franchise. A solid grasp of “the numbers” will help you determine which businesses you can realistically afford. In this article, we’ll break down the typical costs associated with and guide you on how to best invest your money.

The Big 3 Franchise Costs

Considering investing in a franchise? It’s crucial to understand the three main categories of costs involved:

  1. Franchise Fee: This initial fee grants you the license to operate under the franchise’s brand and business systems for a specific period. Think of it as the “cost of admission.” Typically, franchise fees range between $25,000 and $50,000.
  2. Startup Costs: These are the expenses required to launch your new business. Initial investments can vary widely; some low-cost franchises cost under $20,000, while others may require several million dollars. Generally, service-based businesses demand less investment compared to retail or food franchises due to lower real estate and buildout costs. On average, franchises cost around $150,000 to start, according to Franchise Business Review.
  3. Recurring Fees: Beyond the franchise and startup costs, ongoing fees are charged in exchange for the benefits you’ll receive as a franchisee. These include royalty fees, advertising and marketing fees, technology fees, and more. We will explore these recurring fees in greater detail later in the article.

Financial Requirements for Franchise Candidates

Franchisors set financial criteria for franchisees, requiring minimum levels of liquidity and net worth. Liquidity ensures funds for initial costs, while net worth confirms financial stability to manage the business successfully.

Franchise Preparation Costs

Embarking on your franchise journey requires the support of two critical partners: a franchise lawyer and a business accountant.

Franchise Attorney

Navigating legally binding franchising documents can be daunting without an experienced franchise attorney. They will assist you in reviewing the Franchise Disclosure Document (FDD) and the Franchise Agreement, ensuring you don’t miss any crucial details before signing.

Business Accountant

Accounting services
Accounting services

Hiring a trusted accountant is essential for any business owner. They provide valuable guidance on setting up your financial records, tax preparation, determining working capital requirements, and much more.

Building and Construction Costs

These costs encompass real estate fees, zoning, contractor services, construction, and furnishing expenses. Many franchise brands collaborate with franchisees to identify optimal locations for new franchises. Leasing options might also be available if preferred.

Equipment Costs

Equipment expenses can vary greatly depending on the franchise concept. For instance, a Kona Ice franchise requires purchasing a Kona Entertainment Vehicle (K.E.V.), with the 2021 FDD stating the cost of the “truck and installed equipment” as $124,500. Office-based franchises might require printers, desks, and office supplies, whereas restaurant franchises could incur significant equipment costs. Some brands, like Subway, offer equipment leasing options.

Material Costs

Opening a retail franchise typically necessitates purchasing materials for sale. Many brands provide approved vendors and bulk purchasing contracts to facilitate this process.

Additional Franchise Costs

When investing in a franchise, be aware of additional costs beyond the initial fees detailed in the Franchise Disclosure Document (FDD). Key expenses include royalties (4% to 12% of revenue), advertising fees (2% to 5% of revenue), and other monthly fees for services like technology and training. Each franchise outlines its own fee structure in Item 5 of the FDD, with a breakdown of initial investment costs in Item 7. Understanding these costs is crucial for potential franchisees.