Are you someone who is considering purchasing a franchise? While a lot of people consider owning a franchise, not many take the time to do a proper calculation of a franchise cost. It turns out that there are several factors that affect the final cost of the franchise which means that each company will be different. However, no matter which restaurant you’re interested in, there are a few common costs that are the same in each situation. This includes the franchise fee, all build-out costs, contractor fees, professional fees, signage, and your inventory. It also requires that you have enough working capital to open and stay in business until the business can actually support itself. Let’s take a moment to further discuss the common costs that come along with a franchise opportunity.
1. Franchise Fee
Every company will require that you pay the initial franchise fees. These fees cover the cost of training, support as well as site selection. The benefits (or items) that are included in these fees are different from one company to the next. In certain instances, these fees are simply an upfront licensing fee which gives the owner the right to use the company’s name. This is why it’s a good idea to take the time to do research into what you will be getting in return when paying your franchise fee.
This fee can range from $20,000 to $50,000. For example, McDonald’s franchise fee is on the higher end at $45,000. However, there are some cases in which your fee may be less than $20,000. Those with lower franchise fees are typically mobile or even home-based.
2. Legal and Accounting Fees
If you are interested in purchasing a franchise then you should consult with a professional franchise attorney. He or she will be able to help you review the Franchise Disclosure Document, better known as the FDD. They can also help you to better understand the franchise agreement. While there are no set fees, in this case, you should expect to pay anywhere from $1,500 to $5,000 to enlist the help of a franchise attorney. The amount you pay also comes down to how much time you spend with your attorney.
Just remember to keep a thorough and clear record from the very beginning. You may even consider hiring a professional accountant to keep an account specifically for your meetings. Not only can the accountant ensure that you don’t go over budget with your legal fees, but they can also make sure that you have enough working capital.
3. Working Capital
The cash that you have available from day to day is referred to as working capital. This amount needs to be able to cover a specific length of time. This time period can range from two to three years-whenever your business starts to pick up. McDonald’s requires a working capital of $750,000.
The franchisor will usually provide estimates of the amount that you need, however, it’s a good idea to do your own research if you want to make sure that your calculations are based on your market rather than system averages.
4. Build-Out Costs
Build-out cost is another factor that can vary from one franchise to the next. Once you have decided on a location which the company approves, you will be able to determine the build-out costs. This includes furniture, equipment, signage, and fixtures. It may also include the professional fees for architectural drawings, contractor fees, security, insurance, and landscaping. There is one exception: home-based franchise; these franchises have no build-out costs.
5. Supplies
You can’t run your franchise without the proper supplies. This may be something as simple as plastic utensils to your everyday office supplies. Franchisors will usually provide a list of what is needed. This amount can vary, but an owner should expect to pay well over $100,000 in most cases.
6. Inventory
If you are buying a retail franchise, or any other franchise where you are selling a specific product, you must stock up on inventory. Once again, every franchise is different and has different requirements. You may be required to buy between $20,000 and $150,000 worth of inventory.
7. Expenses While Training
Franchisors provide training for owners and at least one employee. In fact, completing training is usually a requirement. Although the training is usually covered by your franchise fee, the owner will be responsible for travel and living expenses. This amount can also vary based on location and the needs of the individuals.
As you can see, owning a franchise is not a straight-forward endeavor. If you want to be successful with your purchase, then you need to understand all of the different factors that come into play financially. In cases of franchises like Mcdonald’s, your total costs will amount to more than $900,000. However, with diligent research and realistic expectations, you should be able to secure a place with your chain of choice.
