What are Normal Start-Up Costs for a Franchise?

What is considered normal start-up costs for one franchise business may not be so for another. Many factors can be involved, but generally most franchises will have at least some of the ones mentioned in this article. Dollar figures may be vastly different, also, which is why no actual amounts have been quoted.

•Front-end Franchise Fees

These include how much the investment into the franchise itself costs as well as business licenses and permits and other expenses that must be met before the franchise can even begin operation.

•Ongoing Royalty Fees

Ongoing royalty fees are what you pay when you first “buy into” a franchise. As the name implies, this is a continual expense. As long as the business continues, the franchisee will have to pay for rights to brand or trade names, products, logos, and anything else that is considered as belonging to the franchisor.

•Real Estate

This is the literal property that the building sits on, and where it is located will affect how much it costs. It may be cheaper to build, lease, or rent cheaper part of town, but the franchisee will have to consider if choosing that location will affect business. Also, some franchisers do look at crime rates in certain areas. If the figures are not favorable, franchisers may not allow a franchise to be opened in a high-crime area unless there is a powerful incentive, such as neighborhood restoration or re-gentrification efforts being made, or assurances from local authorities or governments that precautions will be taken to ensure the safety of employees and protection of property.

•Inventory and Equipment

If the franchisee has a choice as to where purchases can be made, as long as it meets franchiser approval or protocol, these costs may be less. If, however, the franchisee is obligated to buy from certain suppliers, the costs may be more. How much inventory the franchisee is expected to keep on hand may also need to be considered. The franchisor may feel that at first a larger amount will be needed in order to meet demand and avoid delays or loss of sales.

•Legal costs

If the franchisee is responsible for hiring a franchise attorney, that may be necessary at the beginning, so that he will be available to advise in legal matters and examine legal documents. Even if the franchisee can use the franchiser’s attorney, the franchisee may have to pay a fee to the attorney or the franchiser for the legal work performed.

•Planning costs

If a business plan is required, the franchisee will have to decide whether to write his own business plan or get someone to do it. The business plan is usually one of the first documents submitted; therefore, any expense incurred will be considered start-up cost.

•Advertising/Marketing Budget

The franchiser may help with this, or the franchisee may be expected to create, pay for, and disseminate all advertising. The franchiser may require that some pre-opening advertising and marketing be done; therefore, this will be considered as part of the start-up cost.

•Cash Flow Analysis

This is often considered documentation that must be submitted before any sale is made. The franchisee will have to determine if he can figure this out himself or will need to hire an accountant to do it. He may have to hire his own accountant; however, he may be able to use the franchiser’s accountant. If this is possible, the franchisee may still be expected to compensate him for his time.