How Much Will You Need to Fund a Franchise Purchase?

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Franchise ownership is a powerful way to become a business owner. Franchises come with established brand recognition, best practices, support and processes that can accelerate profitability and growth.

Starting a franchise is unlike starting any other type of business. As seen in the recent post, Women in Business: Is Franchising in Your Future?, more women are starting small businesses of all types, including franchises. They have access to networks, turnkey marketing and operational plans and many franchise-friendly locations across the country.

Starting a franchise business also comes with a number of fees before and during your ownership that are unique to the business type. How much will you need to fund a franchise purchase? Let us take a closer look.

Franchise Costs Explained

Below are some of the typical fees and costs associated with buying a franchise.

Initial Franchise Fee

Buying a franchise means you are buying into an established business model. Paying for that privilege and experience carries with it both upfront and ongoing costs.

Most franchises require a new franchisee to pay a one-time fee to become a franchise owner. These fees are typically between $20,000 and $50,000. Lower franchise fees generally are reserved for home-based or mobile businesses.

The initial fee covers training (but not travel expenses), site selection and support. The services included vary significantly by company.

Location Build-Out Costs

You will need to identify a location and get the franchisor’s approval. Then comes the costs of building out the space, including purchase or leases terms, furniture, fixtures, contractor fees, architectural fees, décor, security deposits, insurance and landscaping.

Royalties or Ongoing Franchise Fees

Franchises will pay the franchisor an ongoing royalty. Typically, the fee is calculated as a percentage of gross revenues, usually in the 5 percent to 6 percent range. They generally are paid monthly or quarterly.

Legal and Accounting Fees

Before signing any paperwork, it is prudent to consult with a lawyer and accountant with experience with franchises. They can help you review the franchise disclosure document, which spells out all fees, terms and conditions. 

Marketing Fees

One advantage of franchise ownership is the ability to tap into national advertising. Franchisees often need to contribute to a common marketing or advertising fund for national, regional and local campaigns.

Working Capital

You will need cash to manage operations until revenue starts appearing. Your franchisor can provide an accurate estimate of how much you will need and for how long.

Inventory and Supplies

Some franchises require the use of certain vendors for supplies and inventory purchases.

Business woman smiling.

Franchise Funding Options

One challenge to women business owners is access to capital. Traditional lending sources are not always as likely to approve financing or issue loans for the full desired amount.

That is why many business owners turn to Rollover as Business Start-Ups (ROBs) funding. With a ROBS strategy, you establish your business as a C corporation, which has certain structural provisions that make this funding solution possible.

Once the corporation is created, you create a retirement plan for the corporation and roll over funds from an existing 401(k) or other approved plan type.

The new retirement plan then buys stock in your company. The proceeds from those sales give you the capital you need to start your business.

Benetrends pioneered the use of 401(k) ROBs funding and has helped thousands of small-business owners on their journey to franchise success. To learn more about how Benetrends can help you with your business financing needs, download our free Eguide,  Innovative Funding Strategies for Entrepreneurs.

TOPICS: 401(k) plan purchasing a franchise ROBS Funding Franchise Finance women in franchising

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