The costs to keep on your radar before you embark on your franchising journey
You may have dollar signs in your eyes at the thought of owning a franchise. But while franchising can be a rewarding and lucrative life choice, don’t expect to be rolling in it from the get-go. Here’s an outline of some of the costs to factor in before making any decisions.
Starting a franchise comes with a hefty blow to your bank that you’ll need to recover before turning a profit. You need to fork out the upfront franchise fee – what you pay to use the brand, operating system, training, suppliers, marketing and equipment, and to receive any training and support on offer. The price tag on this fee can range wildly – both across different industries and even within a single company – from as low as $495 to a casual million.
Then there’s the investment you’ll need for things like construction and rent, furniture and fixtures, equipment, staff, insurance, and loan fees and interest. Of course, some brands come with more infrastructure requirements than others. Some franchisors might not need you to even have a premises or hire a team, while others like McDonald’s will want you to kit out a store from scratch.
But the fee central to the franchising model – the fee that will keep parting you with your hard-earned cash – is the royalty fee. Becoming a franchisee ties you to coughing up a percentage of your hard-earned cash each month. Without it, franchising wouldn’t exist – it’s just one of those things you have to take on the chin.
While some royalty fees are pricier than others, they tend to range from about 3% to 6% of monthly gross sales. Once you add the McDonald’s 4% royalty fee to all the other costs handed down by head office, most McDonald’s franchisees are not even left with 6% of the $2.7 million the average restaurant makes a year. With at least $1.3 million in investment needed to open a McDonald’s, on top of the $45,000 franchise fee, it may take a while for you to break even.
There are some not-so-obvious costs to be on the lookout for too. Your bosses may only cover some of your expenses to travel up for training (if any), and might want you to do giveaways or special offers when you open. And while the license might grant you access to the franchise’s suppliers, more affordable prospects on the open market are then out of the picture.
Then there are costs for advertising and marketing, employment screening and business permits, and they differ from franchise to franchise and industry to industry. Some costs you might think would be built into the franchise fee, like training and licenses, may be billed out separately. While most reputable companies will be upfront with what they charge, it’s a good idea to ask lots of questions before you sign anything.
Forbes urges you to factor in a period of net losses before your business takes off. You’ll still have to alert locals to your presence, even if they’re already sold on the brand. Forbes also recommends making sure your business expenses are covered for six months – double what it says most franchisors calculate. And with the Federal Trade Commission warning it can take up to a year to become profitable, the finance publication adds that you should have a year’s savings in the bank to protect your personal life.
You should really consider these savings to be in the same bucket as the other start-up costs – they’re an insurance on your own security. You may want to spend them on a fancy coffee machine instead, doubting you’ll need them. But you’ll thank yourself if you’re unlucky enough to become part of the 20% of businesses who fail in their first year.
Indeed, there are a lot of stats online about how new franchises stand a better chance of success than start-ups owned by sole-proprietors. But not all franchises are thriving Burger Kings. According to Investopedia, the franchise fail rate ranges from 1% to 40%. Don’t take the first stats you find as gospel – it’s better to be aware of all the ways franchises can fail, even if rare, and have a plan in place so you can respond to the dangers if they do come hurtling at you.
In summary, apply a questioning mind to all your due diligence and business planning. When you’re forking out potentially millions of dollars in start-up costs, better to play it safe and treat your franchise just like any other business. Be as prepared as possible and you’ll stand a much better chance of turning healthy profits.