How Much Does It Cost To Open a Franchise?

The cost to start a franchise can vary significantly depending on the specific franchise business and the industry segment where you plan to open your business. This will help you understand the cost to open a franchise. This is because some franchises have an initial franchise cost of $10,000, while others may be more expensive, with initial franchise cost going upwards of $5 million. However, most franchise costs will range between $50,000 and $200,000 to start your franchise business.

Let’s take a look at what factors affect the franchise costs.

Factors that affect the franchise cost

The cost to open a franchise will largely depend on 3 factors:

1. Franchise Brand
2. Franchise Industry
3. Franchise location

These 3 factors will quickly give you an estimate of the expected franchise cost that you will have to bear.

Once you zero in on the brand, industry, and location you can get an estimate of the franchise cost through a franchise disclosure document (FDD). FDD  has 23 sections and it should be reviewed before signing the franchise agreement. Section 5,6, and 7 will outline the initial fees, other fees, and estimated initial investment required to start the franchise. These factors decide the cost of entry. 

To calculate the total franchise cost we’ll have to know what different costs are associated with opening a franchise. Budgets as small as $10,000 can fund a home-based franchise option. Hotels, especially those in prime locations, can easily cost over $5 million. The average cost of a full-service restaurant is between $750,000 and $3 million. The average cost of opening a fast food restaurant is above $1 million. It costs between $200,000 and $300,000 to build a garage just for servicing automobiles. Apart from these costs, franchisors will ask franchisees to have certain liquidity before they sign the franchise agreement. Keep in mind these are ballpark figures; the actual cost of opening a franchise will differ depending on the specific brand being considered.

So, what are the different fees that make up this franchise cost?

Franchise Fees - Different costs associated with opening a franchise

When calculating the franchise cost you have to take into account the following fees. Few of the costs such as professional fee would be a one time fee while others may be recurring such as royalty fees.

Here are the different franchise costs:
 

• Professional Fees: Before you invest, you may need an attorney to look over the Franchise Disclosure Document (FDD) and the franchise agreement and an accountant to help you go through all the numbers.
• Franchise Fee: This is a one time fee charged by the franchise to use their brand and business systems. The average franchise fee generally ranges between $25,000 and $50,000.
• Royalty Fee: This is a regular franchise cost because it is calculated as a fixed percentage of gross sales and paid monthly to the franchisor. Depending on the type of franchise you own, they usually range from 4% to 12% or could be a fixed amount. As long as you have the franchise, you will have to pay this fee.
• Operating Capital: Also known as working capital, this is the money you need on hand to pay all of your franchise's daily operating costs. Most franchisors will tell you to have enough money to run your franchise for at least six months before you start it. This will help you grow your business. Franchises often take several months before they start making enough money to cover their initial investment expenditures from sales.
• Supplies and equipment: Inventory may consist of everything from merchandise to point-of-sale hardware to everyday items like office supplies, cleaning materials, minor appliances, etc. 
• Building and Construction: Franchise costs related to the building and construction process may include those for purchasing land, obtaining a building permit, hiring a contractor, having the building constructed, and purchasing furniture and fixtures. Franchise brands often help their franchisees choose the perfect spot for their businesses. Leasing a space may be an alternative to buying, depending on your needs.
• Furniture and fixtures: In some cases, franchisors will ask that all of their franchises use the same kind of furniture. In some, the franchisee might be able to use the furniture they already have.
• Insurance: Franchises need workers' compensation insurance just like any other business with employees. Business owners with stores also need to invest in property and casualty insurance, while those operating out of their vehicles only need to purchase auto insurance.
• Advertising and marketing: Even though each franchise is usually responsible for its own signs, advertising costs may be split between several franchises.

Franchise Cost Examples

The franchise costs associated with opening a franchise vary significantly from segment to segment. For example, for those looking for low-cost opportunities, mobile or home service concepts tend to have a much lower initial investment as there are no construction or rent costs. Brick-and-mortar retail stores or experiential concepts, on the other hand, may require higher startup costs.

Even when only looking at concepts within a certain industry, the investment structure will vary from brand to brand. In the restaurant industry, for example, a Chick-Fil-A franchise requires an initial investment of only $10,000 because the franchisor covers all opening expenses in exchange for a higher royalty fee. A McDonald’s franchise costs between $1.3 million and $2.3 million to open, but franchisees also have to pay rent to the franchisor, pay their workers, pay food costs, pay for technology and marketing fees and pay a 4% royalty on gross sales. Dunkin’ startup costs range from $465,000 to $1,597,000, while the total investment for a traditional Jamba Juice store ranges from $273,000 to $504,300.

There may even be a range of investment options offered by the individual brand. For example, the cost of opening a Cinnabon franchise depends on what type of bakery a candidate wants to open: full, express or concession. 

Remember, in addition to startup costs, most franchisors also require franchisee candidates to have a certain minimum net worth before they are allowed to sign on the dotted line. Wendy’s, for example, requires franchisees to have a minimum net worth of $5 million with $2 million in liquid assets.

Final Thoughts

Any business requires an initial investment and franchising is no exception. But investing in a franchise offers entrepreneurs several benefits that don’t come with starting a business from scratch. Before signing on with a franchise, it is important to analyze the franchise costs and initial investment requirements to ensure it is the right financial fit for you.

FAQs - Franchise Costs

How much does it cost to open a franchise?

The franchise cost completely depends on the franchise brand, industry, and location. You can start a franchise with as low as $10,000 and as high as $5 million.

What is included in the initial franchise fee?

The initial franchise fee typically covers the right to use the franchisor's name, branding, and business model. It may also include initial training and support, as well as access to proprietary systems and processes. Some franchisors may also include initial marketing materials and support in the initial franchise fee.

Are there any financing options available for starting a franchise?

Yes, there are many financing options available for starting a franchise. Some franchisors offer financing assistance or have relationships with lenders who can provide financing for franchisees. In addition, there are many banks and other financial institutions that offer loans specifically for starting a franchise. You may also be able to use personal savings, equity in your home, or other assets to finance your franchise.

Are there any tax benefits to owning a franchise?

Yes, there may be tax benefits to owning a franchise. For example, you may be able to take advantage of deductions for business expenses, such as the cost of the franchise fee, equipment purchases, and ongoing fees. You may also be able to claim depreciation on business assets, such as equipment and real estate. It's important to consult with a tax professional or financial advisor to understand the tax implications of owning a franchise.