Franchise Costs: What to Expect

Like any business, franchising comes with costs. Some are startup costs, while others fund the ongoing operation of the business. And some are determined by your particular goals, both for yourself and your franchise. Overall, these costs tend to be lower than if you were to start a similar business through a traditional entrepreneurship model. That’s because franchising involves a proven business system, so you save yourself the expensive trial-and-error of creating a business from scratch.

The federally mandated Franchise Disclosure Document (FDD) should include business-specific details about all these costs. As you’re going through due diligence, the franchisor should also be willing to answer your questions about how these costs relate to their business model. To help you plan ahead, however, here’s a general idea of the costs you should expect to pay as a franchise owner.

Startup Franchise Costs

Franchise Fee

When you sign your franchise agreement, you’ll have to pay a franchise fee to the franchisor. This is a one-time, up-front fee to license their business system. It also compensates the franchisor for the time and money they invest in preparing you to operate one of their franchises. Franchise fees vary widely. National brands or franchisors with a more complex business system tend to charge more.

You’ll also pay more to be a multi-unit owner or area developer, of course, since those contracts involve purchasing multiple franchise locations. Note that franchisors don’t typically discount their per-unit fee just because you commit to opening multiple locations. If a single franchise costs $75,000, expect to pay $225,000 for the right to own three units.

The larger the per-unit franchise fee, or the more units you purchase, the more startup support the franchisor should provide. At minimum, your franchisor should offer online training and a manual for the business system. But depending on the franchisor and the size of your investment, you might also be offered in-person training, site visits to help you set up your business, assistance hiring and training your employees, and more.

Setup Costs

Usually, setup costs form the bulk of franchise startup costs. Setup costs are all the out-of-pocket costs associated with launching your business. For a brick-and-mortar franchise, these include leasing or buying a storefront, building it out and furnishing it to the franchisor’s specifications, and stocking your inventory. Setup costs tend to be significantly lower for home-based franchises, since you’re not leasing or buying real estate. However, you might still need to outfit a home office or storage space.

Other startup costs can include specialized supplies and equipment, such as those required for restaurants, automotive repair shops, or cleaning businesses. Some service franchises–such as tax preparation or home health care–may also involve licensing or certification fees.

If you have plenty of money to spend but not much time to dedicate to setting up your franchise, consider purchasing a turnkey franchise. These usually roll the setup costs for your franchise into the franchise fee. Essentially, you pay the setup costs to the franchisor instead of spending them yourself. In return, the franchisor handles all the work of setting up the business. You just “turn the key” and start selling.

Ongoing Franchise Costs

Marketing Fees and Royalties

In addition to franchise fees, franchisors typically charge marketing fees and royalties. These are usually paid monthly or quarterly, either as a flat fee or as a percentage of your revenue. The marketing fee compensates the franchisor for your use of the established brand they’ve built over time. In most cases, it also helps fund centralized marketing campaigns that benefit all the franchisees in the network. For instance, your franchisor might pay for television ads, billboards, or Google search ads that run nationally or regionally.

Royalties compensate the franchisor for the ongoing support they provide once your business is up and running (as opposed to the training and other support they provided before launch). This support might include training opportunities, an inside sales team to generate leads for your business, the use of proprietary software for tracking inventory or booking service appointments, and more.

When you review the franchise costs in the FDD, you should expect to see a balance between the up-front franchise fee and the ongoing royalty payment. A larger franchise fee should mean a smaller royalty, and vice versa. Both should be in proportion to the fees for similar franchises. If they’re not, that could be a red flag that the franchisor is not financially healthy and is trying to cover its losses by extracting excessive fees from franchisees.

Operating Expenses

Operating expenses are the ongoing costs to keep your business open: everything from utility bills and inventory replenishment to employee wages and any marketing you might do on top of your franchisor’s activities. The FDD should provide you with a general idea of a franchise’s operating costs. You can also talk to current franchise owners to get an idea of what to expect. As with setup costs, home-based franchises tend to have lower operating expenses due to the lack of real estate involved.

Operating expenses can be the most difficult to predict–and the most likely to sink your business. If you come to franchising with significant business experience, you’ll hopefully have practice creating and managing an operating budget. If this is something you’ve never done before, tread carefully. Consider obtaining some training for first-time entrepreneurs. For instance, take a business finance class at your local community college or get some help from your city’s entrepreneur center. Read your FDD very carefully and take full advantage of any opportunity to learn from existing owners in the franchise network.

Your Own Salary

Though you won’t be able to pay yourself a salary right away, you should eventually have the option to draw an income from your franchise. There are two ways you can help ensure that paying yourself doesn’t create a hardship for your business. First, plan to adjust your salary based on business performance. This will serve the two-fold purpose of rewarding you when business does well and helping your business when times are lean. Second, decide ahead of time what you would like your salary to be–not just at first, but over the long term. This will give you specific, measurable goals to strive for and help you avoid overdrawing money from your business.

Investing in the Business

This is an optional franchise cost but a very important one. If you want your business to grow, you’ll need to plan on investing some or all of your profits back into it. This is true whether you want to maintain a single location but grow your customer base, or expand from one location to many. To the best of your ability, make a plan for business investment and expansion before you open your doors. Even if the plan is very general and has to be adjusted later, you’re more likely to succeed if you have one.

Need some assistance understanding or planning ahead for your franchise costs? My co-consultant Lauri and I can help. Book some time with one of us today to start the conversation – 20 minutes is all it takes!

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