When you are thinking about owning a franchise, understanding the costs of starting up your business and how to finance those costs is critical. Having a clear sense as to what it takes to open the doors varies from franchise to franchise, but there are several common costs that most franchisees face.
Here is a close look at what to expect when funding your franchise.Initial Franchise Fee
The initial franchise fee is paid to the franchisor for the right to the franchise's brand name, service mark, trademarks, and proprietary business operations processes. The franchise fee often covers any royalty payments to the franchisor and initial training costs for the franchise owner (though not travel expenses associated with the training). Site selection may also be included in the franchise fee. The cost of the franchise fee can vary widely but is usually less for home-based and mobile franchises that in-store franchises.
Professional Services Fee
You will need help from a lawyer and an accountant to make sure that professionals examine business agreements and terms. These professionals can help you understand your obligations and rights. Having sound legal counsel is wise, not just at the beginning of the franchise, but also throughout your ownership. Similarly, having sound record-keeping and reliable analysis is essential to business success. Most franchisors today provide software that includes charts of accounts that your accountant can use.
Your franchisor wants to be sure you are following brand procedures and best practices. This is a mutually beneficial process that can help answer questions and help you connect with other new franchise owners. You will need to account for travel, food, hotel or other lodgings, and living expenses while undergoing training.
This cost varies widely depending on whether you are purchasing an existing franchise location or opening a new site. These costs include building lease, land purchase, and construction or renovation costs. If you are building a new site, you will also have built-out costs, such as furniture, fixtures, and signage. You may also need to factor in architectural fees, zoning and license fees, security systems, landscaping, and insurance.
Equipment and Supplies
Each franchise is different, but there will be required equipment, some of which may include specific vendor and model requirements by the franchisor. This cost obviously differs by franchise, but whether it is plastic forks and napkins for your fast-food franchise or barber chairs and mirrors for a beauty franchise, it is important to factor in this cost in your initial financial planning.
The reality is that revenue will not be immediate, and you will need working capital to make the business operate. This day-to-day cash needs to cover operational expenses for a certain period until the business is off the ground and drawing paying customers. Depending on the business, this capital may be needed for as little as 2-3 months or as long as 2-3 years. Your franchisor can provide you with realistic estimates for this carrying cost.
What are you selling? If it is a service, then your inventory cost may be rather low, but if it is a retail, dining, or product-related business, you will likely need to purchase inventory. You will need to check with your franchisor to get a sense of the volume and cost of this inventory.
Where to Find the Costs
One of the most essential documents you need when considering a franchise is the Franchise Disclosure Document. This is federally required information that details all the critical information about a potential franchise and is a great resource to help you gather important information before committing to a specific concept.
The document will include a list of the initial fees and ongoing cost a franchise owner will need. In addition, it will detail what is covered in the franchise fee, any ongoing royalties or monthly fees paid to the franchisor, and what trademarks, branding, and resources those fees cover.
Financing the Dream
With a clear understanding of the required upfront and ongoing costs, a would-be entrepreneur can go about securing the funding necessary. At Benetrends, we work closely with business owners to provide powerful funding options. We pioneered the use of the 401(k) business financing model, which lets you leverage your existing retirement funds to realize that dream.
Our 401(k) business funding model establishes your business as a C corporation and then converts 401(k) or IRA funds to the working capital you need to cover those expenses to generate future profits. You can learn more about how Benetrends can help you with your franchise financing by downloading our e-book.