Anyone considering starting a business must consider the costs. Whether you go it alone or go the franchise route, it’s not cheap to start a new business. Of course, there’s no single “cost” to buy a franchise. No, there are actually hosts of costs associated with franchising a business. Fortunately, they’re a popular choice for entrepreneurial-minded folks, and right now, they’re growing quicker than normal.
But what fees do you need to know about? Is there an “average” cost for buying a franchise? How can you budget accordingly? There’s a lot to learn, but you don’t have to do it on your own. In this guide, we’ll take a look at all the costs involved in buying a franchise, as well as how to choose the best investment and other valuable insights.
In order to figure out the cost of buying a franchise, you have to break down all the different fees involved. For starters, you’ll likely have to pay some professional fees to an attorney and/or an accountant or financial advisor to help you review contracts, budgets, costs, etc. before you actually buy a franchise. Then, you’ll have the franchise fee, which is essentially the cost to buy the franchise and the number that most people are thinking of when they ask how much it costs to buy a franchise.
Every franchise has its own fees, but the SBA says that the average franchise fee is between $20,000 and $50,000. And that’s just to buy the franchise. That’s not counting the startup costs that come along with buying a business:
Make sure that you account for every possible expense that you can think of when you’re planning your franchise budget. After all, you don’t just get to pay the franchise fee and magically have a business ready to open. You still have to do all the legwork, even if the franchisor is assisting with some of it.
Royalty fees are another cost to add to your list. This is usually a monthly payment made to the franchisor that is based on a percentage of revenue. You’ll see them between 4 and 12 percent in most cases, but that will depend on which type of franchise you own. Make sure that you know this fee before you agree to purchase so that you’re not paying the highest royalties if you can help it.
One of the most commonly overlooked fees with franchising is the cost of operating capital. Even a franchise is going to take at least six months to start seeing results—how are you going to keep things running in the meantime? That’s where your operating capital comes into play. Make sure that you’ve got liquid cash on hand, business credit (if necessary or relevant), and other means to pay for things until the business starts to turn a profit for itself.
Operating capital is costly. However, it’s not an expense. It’s an investment in your franchise, and if you are willing to invest, you will earn a return. It just might take some time. For those who don’t have operating capital, finding investors can sometimes help. Or, find out if franchisors are offering discounts or special deals on their fees so that you can inject more into the business.
The best thing that you can do is to take the time to figure out just what it’s going to cost you to get started in franchising, no matter what type of business you want to buy. There’s no sense in getting way ahead of yourself and just assuming that you can afford a franchise only to find out that you don’t qualify for one reason or another. Take the time to research and find a financial professional that’s familiar with franchising that can consult with you on the best steps for your new business.
There are many different ways to afford owning a business, including choosing to purchase a franchise instead of starting your own business from the ground up. The costs of a franchise will vary, but as you can see, they’re pretty easy to figure out once you know what you’re looking for. Be sure that you’re not getting roped into any hidden fees or costs, either. The reliable, reputable franchises will be transparent with all fees, costs, and payments so that you know exactly what you’re getting. After all, they don’t want you to fail, either.
Besides the cash, there are other criteria that you typically have to meet before you buy a franchise. For example, they may want you to have a certain net worth and amount of liquid assets before you can even agree to purchase their franchise. Others might have higher startup costs because they do the work for you, or like Chick-Fil-A, they may require a minimal investment and cover the operating costs by charging a higher royalty fee. You have to know everything about the financials of the franchise that you’re buying, including what’s expected of you. After all, even if you can get a franchise for $30,000, that’s just the price to use the name and build the business. Essentially, it’s your admission ticket. There are still a lot of expenses to come.
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