Investing in a Franchise: What It’ll Cost and What You Can Afford

Two people use a calculator to determine how much a franchise will cost

For many prospective franchise owners, one of the most important considerations is cost. Here are eight costs you must consider when evaluating and comparing franchise units:

1

Initial franchise fee.

Most franchisors charge tens of thousands to hundreds of thousands of dollars for the rights to set up a franchise unit. In exchange for this fee, franchisors will grant unit owners the rights to use the business’s name, its format or system, and its marketing collateral. They may also provide training, support, and assistance in finding a location or working through other challenges of startup and ongoing operations.

2

Royalty payments.

Many franchisors charge ongoing royalty payments based on a franchise unit’s weekly or monthly gross income. In most franchise arrangements, this fee is 2-10 percent of total revenue.

 

It’s often the case that franchise unit owners must pay the royalty fees even when their net income is negative, the franchisor fails to provide promised services, or the franchise unit owner terminates the franchise agreement before the end of the franchise contract.

3

Advertising fees.

Franchise unit owners generally pay to promote their local franchise unit. However, some franchisors also require their unit owners to pay part of the organization’s national advertising costs, which may be used to attract new customers in other parts of the country and new franchise owners.

4

Real estate and related costs.

Franchise unit owners are responsible for purchasing land or buildings, making updates or modifications to existing buildings, or paying rent and security deposits to a commercial property owner for the use of their structure. Additionally, owners are responsible for paying local property taxes, utilities, licenses, and other costs required to run a business in a specific location.

5

Signage.

Franchise unit owners typically pay for the outdoor signage for their business. Most franchisors require unit owners to purchase their signage package, which can be quite costly.

6

Equipment.

Franchise unit owners must cover the costs of essential equipment. While many franchisors specify the precise models of equipment their unit owners must attain, they may arrange deals with distributors to reduce the price new owners pay to purchase or lease that equipment.

7

Initial inventory.

Franchise unit owners should plan to cover the costs of their opening inventory needs. Many franchisors advise attaining a two-week supply of inventory, but others, especially those with complex sales models, may require a much greater supply.

8

Working capital.

Franchise unit owners should plan to have 12 months of working capital on hand to cover the costs of operations, especially since it can take a year or more for a franchise to become profitable. Costs of operation may include rent payments, utility payments, cash-on-hand to make change for customers, salaries and wages, inventory needs, emergency repairs, and other recurring or one-time expenses.

These costs will vary by franchise and region of operation. However, you can arrive at a reasonable estimate by speaking with a franchise representative and reviewing the franchise disclosure document (FDD).

 

What are the cash requirements of opening a franchise?

Many franchisors require prospective owners to have a specific amount of cash on hand to invest in the business, as well as a baseline net worth (calculated as the total value of your assets minus your debts and liabilities). In a 2020 sample review of franchises, we found the following personal asset requirements using publicly available data:

Franchise

Cash-on-hand requirement Personal net worth requirement

Ace Handyman Service

$75,000 $250,000

Allstate Insurance Agency

$100,000 $100,000

Batteries Plus

$100,000 $350,000

Checkers Drive In Restaurants, Inc.

$250,000 $750,000

Concrete Craft

$101,800 $200,000

Glass Doctor

$35,000 $150,000

GYMGUYZ

$60,000 $150,000

Jackson Hewitt Tax Service

$100,000 $500,000

Jimmy John’s Gourmet Sandwiches

$200,000 $1,000,000

La Macaron

$75,000 $250,000

Maaco

$140,000 $300,000

Medi-Weightloss

$450,000 $750,000

Midas International

$75,000 $250,000

Mosquito Authority

$25,000 $200,000

Paul Davis Restoration

$500,000 $300,000

Plato’s Closet

$90,000 $400,000

SuperCuts

$75,000 $500,000

Sylvan Learning

$75,000 $150,000

The Cleaning Authority

$50,000 $250,000

The UPS Store

$60,000 $150,000

How can I cover the costs of a franchise?

Start by assessing how much cash you have on hand to invest. Review your savings accounts, investment accounts, vehicle values, insurance cash values, and home equity availability to calculate the breadth of your personal asset resources.

Retirement accounts are an often-overlooked investment vehicle that can be used to cover many of the costs of a franchise startup. There are three ways to access your retirement account assets to help you with your purchase:

1. Loan 2. ROBS 3. Distribution
You can access the money in your 401(k) with a 401(k) loan. In some circumstances, you may also be able to borrow against a 403(b) or a 457(b) account. You can access the money in your 401(k), traditional IRA, SIMPLE IRA, SEP-IRA, 403(b), 457(b), Keogh plan, or thrift savings plan (TSP) by setting up a rollover as business startup (ROBS) scenario. You can take a distribution from your retirement savings account.

 

You can learn more about these options in our guide, How to Use Your Retirement Savings to Fund Your New Franchise.

 

Can I borrow money to cover some of the costs?

Most lenders will not loan you money to cover the upfront franchising fee. However, you may attain a loan to cover the costs of your real estate purchases, equipment, or ongoing cash needs. Some of the options you might consider include:

SBA loans

The Small Business Administration (SBA) offers two kinds of loans that help franchise owners access the capital they need to start or build their business.

 

In our guide, Finance Your New Franchise with an SBA Loan, we explain 7(a) loans and 504 loans and how you can use them to make your entrepreneurial goals a reality.

Franchisor financing

Some franchisors have programs in place that help prospective unit owners cover all or a portion of the funds they need for their initial investment. In some instances, the franchisor acts as a lender, and in others, the franchisor connects new owners with a partner lender.

 

You can learn about this form of financing in our guide, Considering Franchisor Financing? Here’s What You Should Know.

Term loans

Many bank lenders also offer term loans that enable small business owners to borrow a specified amount of money for a specific business purpose. These loans can be difficult to qualify for, but they are often a great option for qualified borrowers.

 

Learn more about term loans in our guide, An Overview of Term Loans for Franchisees.

Lines of credit

Some lenders allow franchise unit owners to establish a line of credit that allows them to access cash when and how they need it. Lines of credit aren’t often used to fund large purchases, such as startup costs, but they can help unit owners cover early irregularities in cash flows.

 

This form of financing is seldom advertised by lenders, but many offer it to those who inquire. Contact your preferred financial institution to learn more about this option.

Asset-backed loans

Many commercial banks, community banks, and credit unions allow small business owners to access capital by borrowing against their high-cost assets, including their inventory, machinery, non-mortgaged real estate, or other tangible assets with verifiable value.

 

You can learn more about these kinds of loans and their qualifications in our guide, Why Choose Asset-Backed Financing?.

Equipment financing

Owners of franchise units requiring expensive equipment can often benefit from partner arrangements between the franchisor and equipment wholesalers or distributors. Through these arrangements, franchisors ensure that their unit owners can attain favorable prices or financing directly from the equipment seller, which is often structured as a lease with favorable terms.

Contact the franchise representative at your target franchise to learn about this option.

For most of these options, creditors will make lending decisions based on your credit score, income, net worth, debts, and experience running or managing a business. Some loans, including those that collateralize assets, put less of an emphasis on personal credit than they do the value of what they can reclaim in the event of a default.

Another option you might consider is partnering to raise the capital you need for startup. A partner may be able to provide the financial resources you need to get started, as well as the managerial knowhow or industry experience that can help make your venture a success. Learn more about partnering opportunities, benefits, and considerations in our guide, Partnering to Raise the Capital You Need to Buy a Business.

 

Which option is right for me?

Before making any financing decisions, you should meet with a certified public accountant (CPA) to weigh your options. Your CPA can help you compare the rates, terms, and risks of every option you consider and develop a plan that’ll help you prepare for repayment.

Need help finding a CPA? Click the button below to connect with highly qualified CPAs who excel at working with clients just like you.

 

What’s next?

Once you calculate what you can afford to spend on a franchise and how much you’re willing to leverage, you can move on to the next step of the franchise acquisition process: finding franchise opportunities that allow you to put your skills and experience to work. We can help you with this important step and every other part of buying a franchise unit. Log into your owner’s portal for articles, checklists, and advice you can use to make your venture a success.

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