Operating a franchise can be an incredibly lucrative venture, but, as the old saying goes, it takes money to make money. Before you can turn that outfit into a goldmine, you need to have a pretty sizable nest egg ready to invest, and the outgoings don’t begin and end with start-up fees.
There are a number of ongoing costs when operating a franchise, costs that can be a significant drain on your revenue stream if you don’t plan ahead. Of course, these costs can differ dramatically from franchise to franchise, so we always advise doing some industry-specific research, but there are also plenty of general costs that we’re going to run through in this post.
Startup Costs of Operating a Franchise
Let’s begin at the beginning, with the startup fees associated with operating a franchise.
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1. The Franchise Fee
You can think of a franchise fee as the buy-in rate, the cost of association with the brand in question. As you’re going to be making money off their name, it’s only fair that you invest some cash upfront for the privilege. As for how much franchise fees are, it depends on the scale of the brand and the nature of the franchise.
For instance, a mobile or home-based franchise fee will be more modest than those associated with building a brick-and-mortar location. Typically, it will land somewhere between $20,000 and $50,000, but it may well be even more depending on the particulars of the franchise.
This fee doesn’t only cover brand association, but development support too, such as location scouting and personal training. You need as precise an estimate of the franchise fees before signing as possible.
2. The Legal Fees
Hiring an attorney familiar with franchise law to analyze the official documentation and oversee the deal is entirely optional but highly recommended. They will look over the subtleties of the agreement to make sure that it’s fair. Costs vary from firm to firm and how long the attorney spends thumbing through the contract, but you should put aside something along the lines of $1500–$5000 for their service.
3. The Accounting Fees
Here’s another optional fee, but again, one we highly recommend budgeting for. A professional accountant will help you set up your books and ensure everything is on the up and up, so you don’t accidentally get into any financial trouble while establishing your franchise.
What’s more, they can help you create an airtight budget and establish what sort of working capital you’ll need to take your business from brand-new to profitable.
4. Working Capital
Any franchiser worth their salt will provide you an estimate of the working capital you’ll need to float the business until it starts bringing in steady revenue, but we say it’s crucial to do a bit of your own supplementary research on the topic as well.
It’s a complex budgeting process that must take into account geography, population, spending habits, and the performance of existing franchise locations.
5. The Cost Of Construction
It also falls to you to actually build the property, meaning you’ll be footing the bill for architectural drawings, contractor fees, zoning compliance fees, security installations, deposits, landscaping, decorating, and insurance. The franchiser should provide a rough estimate of build-out costs, but it’s up to you to hone in on a more specific sum.
6. Initial Inventory
Before you cut the ribbon on opening day, you need to stock those shelves, so prepare to fork out for some inventory!
7. Travel & Living Expenses
You and perhaps your management team will likely have to head out of town to receive your training, a process that can take anywhere from a couple of days to a whole week, during which you’ll probably have to cover your travel and living expenses.
Ongoing Costs of Operating a Franchise
Now let’s discuss the perpetual outgoings that will keep your franchise afloat!
1. Replenishing Inventory
With any luck, your initial batch of inventory flew off the shelves, leaving your franchise looking, well… rather naked. Now’s the time to buy in a bunch more enticing items or supplies so you can keep up with consumer demand and give people plenty to come and browse.
The key here is to only order what you think you’ll need. It helps to consult the franchiser and perhaps other franchise owners to whip up a rough estimate of inventory fees.
As you’re well aware, people don’t work out of the goodness of their hearts, they do so to earn a living, and as the head honcho of your franchise, you’re responsible for doling out their salaries. The more employees you have, the larger your payroll will be, so be sure to discuss staffing requirements with the franchiser before signing on the dotted line, as this will help you budget accordingly.
3. The Marketing Fees
All marketing strategies will be covered by franchise headquarters, and they may even send you over a lot of the necessary materials, but it won’t all come for free. There may be certain aspects of advertising that you’ll have to cover.
4. Rent & Utilities
If you’re renting out the franchise location, you’ll be responsible for paying all the same bills you’d pay when renting a house — We’re talking rent, energy, water, and fuel. This can be tricky to budget for, but analyzing the temperature swings of the climate in your area is a great way to whip up a rough estimate of utility costs throughout the year.
5. Loan Repayments (If You Borrowed)
Sourcing a loan to cover some of the aforementioned initial costs of operating a franchise is a common strategy, but this means you’ll have to factor in monthly repayments into your budget!
There you have it — A list of the costs associated with starting and operating a franchise. Remember though, this is a general guide to franchise costs, and there may well be a plethora of industry- or brand-specific fees that we haven’t discussed here today, so don’t rest on your laurels.
Do plenty of industry-specific research, and never underestimate the franchiser themselves as a valuable resource. The more prepared you are before taking on a franchise, the brighter your future with the brand will be!