It’s a top question aspiring entrepreneurs looking into franchise opportunities must ask. It’s helpful to start answering it by thinking about the costs in terms of three buckets of money.
Three Buckets of Costs
Bucket one is the franchise fee, the one-time, payment a franchisee makes to the franchisor for the rights to use the brand trademarks and operations playbook. From this playbook, the franchisee derives proven strategies and processes for starting and growing the business successfully, from acquiring customers to pricing best practices and attracting employees. It’s what minimizes risks and maximizes the franchise owner’s success potential.
Across most brands, the franchise fee can be anywhere from $20,000-$60,000 for a single territory or location. Another benefit franchisees enjoy from their franchise system is preferred pricing on needed equipment and inventory, sometimes greatly offsetting the upfront franchise fee. Some franchisees aspire to open multiple locations and build an empire within a brand. Many franchise brands prefer these ambitious franchise owners and discount the franchise fees for additional licenses, making expansion more affordable.
Bucket two is pre-opening start-up costs. These are expenses incurred to prepare the business to launch, including travel/lodging to complete franchise training, installing signage, wrapping a vehicle, purchasing needed equipment, opening supplies, and permits. Pre-opening start-up costs vary depending on the type of business.
Bucket three is working capital. It supports regular operating expenses, such as rent, payroll, insurance, advertising, royalties/fees, and business loan debt service. How much working capital is needed until positive cash flow is reached depends on the industry and particular business model coupled with many decisions an individual franchisee makes about how they approach their start-up. Working capital is the bucket that can vary widely depending on many variables. You must ask many questions, and carefully consider your circumstances to determine how much working capital you need.
The Total Investment
Your total investment to properly capitalize your franchise is the summation of these three buckets of money – the franchise fee, pre-opening costs, and working capital. In the franchise world, total investment costs span a very large range. Home-based or mobile franchise businesses with a small employee base or no employees needed can be under $150,000 when you add up the three buckets of money. Businesses needing a retail location or office space and a larger will staff require more, potentially a lot more.
How to Calculate Your Total Investment
An excellent way to get an accurate estimate of the costs involved in opening your franchise business of interest is by talking to the existing franchise owners of that same brand. After all, they were once in your shoes, concerned about making a good decision and asking the same questions you are today. They can tell you what their experience is, and what it’s costing them to start and grow their business.
Aside from the expected costs of their industry and franchise model, franchisees make individual decisions that can significantly impact their total investment. Some will take on financing while others will not. If a franchisee has a loan to repay, that’s an added ongoing cost (working capital) they must plan for. Some are very active in running their business. Others hire managers to do the heavy lifting on their behalf, which means their payroll will be higher.
When you speak with franchisees in your due diligence, remember to be very specific with these questions about their individual decisions, as these differences influence how much working capital they need. Then, consider how your approach to the franchise is similar or different from their experience and make your calculations from there. Most franchisees will be generous with their time and transparent in what they share with you; they appreciate you are trying to make a good decision for your family and career. You must also consider inflation and the natural rise in costs over time. The economic environment of a franchisee’s start-up five years ago may be quite different than your start-up cost environment today and you must factor that into your calculations.
