How Much Will I Need To Invest In A Franchise?
When you google the cost of a franchise, oftentimes what pops up is simply the franchise fee, which can range anywhere from $1,000 to $80,000 or more. However, that’s just the fee to be a part of the franchise system.
The total cost of a franchise, and therefore what you’ll need to invest, includes many other expenses. These expenses are listed in a chart (Item 7) of a brand’s Franchise Disclosure Document, but you can usually find them online as well if you look hard enough or buy them from FranchiseHelp.
Let’s take a look at some of the most common expenses you’ll need to account for:
Buildout/Construction Costs (Also Known As Leasehold Improvements)
If you’re building a restaurant with a full kitchen, you’ll spend quite a bit more on construction than you would for a tutoring franchise which may just be some paint on the walls, flooring, HVAC, and restrooms. Furthermore, if you’re taking over a space that already has some of those elements in place (like restrooms already built), then you’ll have some cost savings.
Square footage is also a factor for what your investment in construction will cost. If you open a 3,000 square foot location instead of a 1,500 square foot location, it might not cost exactly twice as much, but it will be significantly more.
This is why franchisors often provide an estimated range for this expense. It may say something like $80,000 - $150,000 for Leasehold Improvements. Shouldn’t they have a closer estimate? Well, they don’t know where you’ll be opening yet and neither do you, so it’s impossible to tighten up that estimated range until you know the square footage and existing condition of the space.
Furniture, Fixtures, and Equipment
Again, until you know how big your space is and an architect has done a design layout, you won’t know exactly how many light fixtures, tables and chairs, etc you’ll need in your space. This expense is estimated as a range just like the construction estimate.
Most franchises estimate somewhere between $3,000 to $5,000 that you’ll spend to have an attorney review your franchise agreement or advice you’ll see from other advisors like your accountant.
Sometimes there’s an actual fee associated with training, but if it’s already included in the franchise fee itself, then you’ll simply need to allocate investment dollars for travel and living expenses while you train for the franchise. Depending on the length of training and the particular city it may be hosted, it can range between $500 to $5,000.
As you can see, there are many additional expenses to factor into your franchise investment. In a brand’s FDD, you’ll find all of the detail you need to fully understand your investment.
Items 5 and 6 will cover expenses paid to the Franchisor, and Items 7 and 8 covers the Initial Investment and the suppliers you must use (Franchises typically restrict the suppliers from which you purchase your business equipment / supplies). It is important to note that the initial investment in Item 7 may not cover all expenses necessary to get your business up and running, but should act as a pretty realistic guide. Many business models run at a loss for months if not years before they begin earning, and you do not want to run out of capital as a franchisee, so you’ll want to make sure you have some additional funds set aside for any unexpected expenses.