The Costs to Open a Franchise

The costs to open a franchise is different for every company, but many of the requirements are similar. In most cases, you will be obligated to pay a franchise fee to the franchisor, and you’ll also be responsible for all build-out costs for your location, including furniture, fixtures, and equipment. Other start-up expenses include professional fees, contractor fees, signage, and inventory. And once you open, you’ll also need to make sure you have enough working capital to stay afloat until your business is sustainable. Here is a breakdown of the basic fees.

Legal and Accounting Fees

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Anyone considering buying a franchise should consult with a qualified franchise attorney. Your franchise attorney will help you review the FDD (Franchise Disclosure Document) and the franchise agreement.

There is no one set fee to review these documents, but you'd be safe to set aside anywhere between $1,500 and $5,000 for this expense. As with most legal counsel, the amount of time you spend with your attorney will determine the overall rate.

It's also essential to start record-keeping right away. To keep track of your expenses, you should enlist a qualified accountant. Your franchisor may provide you with software or a chart of accounts, and your accountant will help you set up your books and records. Your accountant can also help you determine how much working capital you will require.

Working Capital

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Working capital is the amount of day-to-day cash available to a business. Depending on the type of business, it is vital to ensure that your working capital covers a particular length of time, ranging from as little as two or three months to as much as two to three years until the business is in full swing.

The franchisor typically provides an estimate of the amount that is needed, but you should do your thorough research on your own to make sure your calculation is based on your market rather than the system average, which may not be accurate for your location.

Franchise Fee

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Most franchise fees are between $20,000 and $50,000. In some cases, you may see franchise fees less than $20,000; these types of franchise opportunities are usually home-based or mobile franchises.

The franchise fee usually covers the cost of training (not including travel expenses), plus support and site selection. The items or benefits that are included in a franchise fee are different for every company.

In some cases, the franchise fee is just an upfront licensing fee for the right to use the franchise name. Be sure to investigate exactly what you are getting in return for the franchise fee.

Build-Out Costs

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Build-out costs can vary wildly between franchises. Once you have decided on a franchise and finished finding a location, which the franchisor will need to approve, the franchisor can help you estimate your overall build-out costs.

These expenses generally include furniture, fixtures, equipment, and signage. There are other start-up costs to consider, including professional fees for civil and architectural drawings, zoning compliance, contractor fees, decor packages, security, deposits and insurance, and landscaping.

If you decide to buy a home-based franchise, there are no build-out costs involved. You may, however, have other costs for software applications or computers. Sometimes these items are included in the franchise fee.

Supplies

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Whether it is a food franchise that offers plastic utensils (small wares) to its customers or a service-based franchise that goes through a lot of office supplies, every franchise needs the proper supplies to do business. Your franchisor should be able to give you an accurate list or estimate of what is required in order to open your franchise.

Inventory

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If you are buying a retail franchise or any other franchise where you are selling a specific product, you must stock up on inventory. Once again, every franchise is different and has different requirements, but you may be required to buy between $20,000 and $150,000 worth of inventory.

Travel and Living Expenses While Training

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Franchisors will routinely provide training to the franchisee, and, more often than not, at least one other employee besides yourself will be required to attend and successfully complete the training.

Although the training itself may be covered by the franchise fee, the franchisee is usually responsible for the training-related travel and living expenses.

With some franchisors, training can last from a few days to one or two weeks. In some more complex franchise systems, meanwhile, the training may extend for many months, with classroom training followed by online webinars or classes.