Financing a Franchise: the Real Costs

When you start looking into a franchise deal, you’ll find any number of sources that quote numbers claiming to be the “total cost to start up,” or some similar number. Without offering any disrespect to the financial experts and researchers who come up with these numbers, let’s simply point out that there is a huge difference in startup costs between, for example, opening a McDonalds in San Rafael, California vs. opening the same store in Ardmore, Oklahoma. With location being just one factor involved in financing a franchise, you can imagine that these numbers are, at best, educated guesses.

So if you can’t get a reliable estimate of the real costs of financing a franchise, what can you get? Well, you can start by at least getting a grip on what the real costs of starting up a franchise consist of.

Typical Costs of Starting a Franchise

  • Attorney Fees: to have a skilled lawyer look over the franchising contract and all related paperwork.
  • Accountant Fees: to have a skilled accountant prepare financial projections and other related paperwork.
  • Licensing Fees: to acquire the necessary licenses to do business in your state and community.
  • Certification Fees: to acquire any certifications (trade industry certificates, food safety certificates, etc.) necessary for you to do business.
  • Structure: to either build or lease a place to do business out of. Can also include landscaping, signage, alarm system installation, and more.
  • Equipment: to purchase or lease the basic equipment (non-consumable goods) you need to do business. Includes uniforms, manuals, and vehicles as well as more obvious items like deep fryers or computers.
  • Inventory: to purchase the starting inventory (consumable goods) that you’ll need to do business.
  • Freight costs: to get all of that equipment and inventory to your store.
  • Insurance: to acquire the various kinds of insurance (general liability, property, business owner’s policy, workman’s compensation, professional liability, commercial auto, directors and officers, data breach, commercial renter’s insurance, key employee insurance, and more!) you’ll need to do business safely.
  • Training: to make sure your employees know how to do their jobs by the time the doors open.
  • Franchise Fee: to obtain the right to use the brand name, business plan, and other assets provided by the franchisor.
  • Initial Advertising: to pay for the ‘alpha strike’ of advertising designed to make sure that there are customers at your door when it opens for the first time.
  • Emergency Fund: most franchisors require you to have 3-6 months of ‘backup funds’ set aside in a special account before you open your doors.

The Franchise Disclosure Document (FDD)

Fortunately, while the numbers you’ll see when you start your own research will vary, every franchisor is required by law to offer a FDD; a document that lists everything you’ll be required to pay, and does so in a way that gives you data accurate to your situation. You might not obtain the document when you first show interest, but they are obligated to give you an FDD at least 2 weeks before you sign the franchising contract, so you can get an idea of how easy it will be to finance your franchise.

The costs involved with financing a franchise are critical in determining whether you have the financial wherewithal to make it through the startup phase and begin turning a profit. Though traditional franchises such as fast food restaurants and automotive centers can be very expensive, there are other emerging industries, such as senior care and home-based sales franchises with minimal startup fees and high profit margins.

To find the best franchise opportunity to fit your passion, skills and budget, and to gain help with franchise financing, it is best to work with a franchise broker. At Franchise City, we are under contract with over 500 of the top national franchise brands across a wide range of industries. Through a unique and proven process, we help match candidates with their ideal business. There are no extra fees and there is no pressure to buy into a franchise; we offer our unlimited consulting services free of charge.

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