What Are the True Costs of Having a Franchise?
It looks like an easy way to make money. Buy a business that’s already been established and has a well-known name, set it up in your neighborhood at an established location, hire employees, and watch the cash roll in.
But really, it’s not that simple. In fact, franchises have lots of hidden costs, some of which may leave you reeling. Don’t get me wrong; they can still be great businesses to have, but there are certain things you should know before you jump in.
Are training and parameters for the business securely established within the business itself?
Not all franchises are created equal. The more successful the franchise, the more likely to cost you more than something that’s not as established, but there’s something to be said for that feeling of "establishment." That is, there are specific rules that have to be followed in a formulaic manner. This leaves you no room for error, but it also leaves you no room for creativity. So this particular type of setup has its advantages and disadvantages. If you happen to be a very creative person who knows what you’re doing and wants to set your own rules, perhaps a franchise isn’t for you. However, if you want a well-established business that’s going to "run itself for you," with a bit of a firm hand, look for an established business that has very strict rules of operation. They’re formulaic, they work, and they are what have helped make this business a success.
What are your franchise fees?
All franchises require you to pay a certain fee to the organization for the privilege of having a business with an established name. In general, this cost will be between $5,000 and $50,000, depending on the business.
What does your initial investment have to be?
The franchise fees are separate from any working capital and setup costs you’re going to have to begin your business. You’ll have to show that you have the required amount set by the franchise itself. This can be anywhere from two to three months’ worth of setup and working capital expenses to as much as two to three years’ worth of setup and working capital expenses.
These fees also include things like buying and renovating the building to the franchise’s expectations, so expect your initial investment to run into the hundreds of thousands of dollars for most franchises.
What are the royalty fees?
The franchise you buy will also expect royalty fees. These are assessed based upon your profits, usually 5 to 10%. If you pay these, you can participate in national advertising campaigns, which can boost your business. However, of course, you also must pay this additional expense. Some franchises absolutely require this royalty no matter what, and some will let you choose whether or not to participate.
Other costs
Finally, you will have ongoing costs for things like employee wages, machinery, upkeep and supplies. Incidentally, some franchises require you to use their vendors so that you won’t get to choose who you buy from, thus sometimes causing you to pay inflated costs or lower than market costs, depending on the franchise itself.
What can you expect profits to be?
Finally of course, the most important question you need to ask yourself is what you can reasonably expect to make and whether or not these expenses are actually worth it in the end. If you can expect to make very generous profits so that having a franchise is worth the extra expense and rules you must follow, that’s wonderful. However, if not, you may want to look into owning another type of business. You won’t have the name recognition, that’s true, but you also won’t have as many rules or restrictions to follow, including fees and additional franchise expenses you must pay. The choice, of course, must be up to you in the end.
Finally, have a talk if you can with someone who already owns a franchise. Are they happy with it, or do they wish they’d done something different? That can be the most valuable information you’ll receive in your search.
