The startup cost for opening a franchise can vary dramatically based upon the type of franchise involved. It is important to remember that even though you will be purchasing a franchise, the franchisor will also be awarding you a franchise. In other words, they are choosing you at the same time you are choosing them. In fact, if the franchise executive with your chosen franchise isn’t asking you several pointed questions about your financial circumstances, you may be dealing with something less than a top franchise.
Excellent franchises want to know that their prospective franchisees are financially equipped, not just to pay the franchise fee, but equipped to be successful in the long term. Franchises generally want to know three key financial indicators about you:
1) Franchisors want to know that you have an adequate amount of cash to pay the franchise fee, and up-front costs.
2) Franchisors want to know that you have adequate credit to obtain funds for the total investment.
3) Franchisors want to know your net worth.
For example a franchise might charge a $25,000 franchise fee, estimate an initial investment of $75,000, estimate a total investment of $110,000 and require a net worth of $250,000. Many times the franchise will include the cost of necessary equipment, real estate, and other key items in the total investment calculation.
It is important to determine if the franchise has included money for operating capital in the estimate of the total investment. Some include it, but many don’t. Operating capital can include many things, but one of the most important to consider is a salary for yourself. If you need a draw, or salary to sustain yourself while the business becomes profitable, be sure you include this in estimates of your total initial investment.
As you can see, determining the amount of startup money needed to open a franchise is tricky, so ask lots of questions during the due-diligence process, and if you feel overwhelmed, bring in a CPA to help you evaluate the opportunity, or visit one of the small business development centers available in many communities. Franchise Consultants can also often provide you with materials to help you know what questions to ask. While there are countless books on writing a business plan, the U.S. Small Business Administration offers a Business Plan Template that provides a great starting place.
In general consider the following:
The franchise fee is usually required to be paid in advance and will often be the bulk portion of the cash portion of the investment, unless there is a retail location involved.
If a retail location is involved, a lease will have to be negotiated and often rent for both the first and last month must be paid prior to move in. A significant percentage of start up costs can be associated with lease improvements, so be aware of what improvements the franchise requires. If you end up purchasing rather than leasing your space, the start-up costs are often 20% to 30% of the total purchase price assuming you are able to obtain appropriate financing.
Equipment can also represent a huge part of the cost for certain franchises, but equipment can often be financed or leased even for franchisees with limited credit. Vehicles, if required, also fall into this category.
In most cases, training is included as a part of the franchise fee, but often the expense of getting to the company’s headquarters, and lodging during training are an additional expense. Even before you make a commitment, franchises will often invite you to a discovery day to meet with key executives, other franchise owners, etc. In most cases, you will be expected to pay for your own travel and lodging for these events.
It is impossible to gauge startup costs for a franchise without detailed conversations with the franchisor. If the franchise executives you are speaking with aren’t asking you questions about how you intend to deal with startup costs, you may want to consider looking into an alternative franchise. An exceptional franchise will want to evaluate your financial resources and help determine if you have adequate startup capital.