If you want to start a business, one popular way to do this is to open a franchise business. There are more than 800,000 franchise businesses in the U.S. employing nearly 9 million people and generating $900 billion of revenue each year. While most people might be familiar with fast food restaurants as a typical example of a franchise business, there are a wide variety of businesses that can be operated as franchises, such as hotels, car rental companies, commercial cleaning businesses and many more.
However, before you decide to start a franchise business and become a “franchisee,” it’s important to understand the full cost of opening a franchise. This type of business offers significant advantages — but make sure you are aware of the possible risks. Many of these are inherent to operating any business venture, but there are also specific franchise operational concerns, such as the franchise fee and any ongoing payments owed to the franchisor.
Here are a few questions to consider before you start your franchise business:
Is It Cheaper to Start a Business From Scratch or Start a Franchise?
Every business has startup costs, and it’s hard to generalize about whether it’s cheaper to buy into an existing business concept by starting a franchise. For example, starting a restaurant costs money for facilities and equipment, regardless of whether you’re buying a franchise or opening an original establishment.
But if you’re going to start a franchise, keep in mind that there are a few special costs built into the business arrangement:
Franchise Fee: Franchisors charge an upfront fee to give you permission to operate a franchise with their brand name. This franchise fee can range from as little as $50,000 (or less) to several million dollars, depending on the brand and the industry.
Ongoing Royalties, Rents, Service Fees or Franchise Payments: Some franchisors will charge monthly rent and service fees based on a percentage of monthly sales.
Financial Requirements: Beyond collecting their franchise fees, major franchisor brands want to make sure that their franchisees are financially stable; there are often requirements for franchisees to make a cash down payment and have a certain minimum amount of personal capital.
Starting a franchise is a major commitment for both the entrepreneur and the existing business. They want to make sure their franchisees have skin in the game and are prepared to invest in the franchise’s future success.
For example, according to the McDonald’s franchising requirements, anyone who wants to buy a McDonald’s franchise in the U.S. is generally required to have at least $500,000 of non-borrowed personal resources and make a cash down payment of at least 25% of the total cost of the restaurant, with the remaining balance financed over no more than 7 years. Exact franchise costs vary depending on the value of each restaurant.
Are Certain Industry Franchises Cheaper Than Others?
Different brands have different financial requirements, and the costs can vary significantly depending on what type of franchise you want to open. However, as a general rule, franchise opportunities in professional service industries and B2B services tend to be more affordable than franchises for major consumer brands or in industries that require physical locations.
For example, a recent article from Fundera about the 13 Best Low Cost Franchises found some of the lowest-cost franchises in industries like fitness, pest control, home inspections and property management. Almost all of these low-cost franchises are in industries where the franchisee is selling a professional service or business-to-business solution – not a big brand name that sells to consumers. Don’t assume that the franchise of your dreams has to be a well-known fast food brand; you might find a lower-cost opportunity buying a franchise with a commercial cleaner or cruise planning company.
How Much Money Are You Giving to Corporate vs. Keeping for Yourself?
In addition to the franchise fee and any other immediate startup costs and initial investments, franchise owners must typically pay an ongoing fee to the franchisor, sometimes called a “service fee." For example, McDonald’s charges its franchisees an ongoing service fee of 4% of monthly sales.
The question is: is your franchisor’s fee structure fair and affordable? No one can answer that question but you. In general, franchisors are supposed to offer some significant benefits that make the franchise costs a good value. For example, when you buy a franchise, you’re getting an established brand that will hopefully help you establish instant credibility with customers. Franchisors also offer significant marketing support, training, coaching and ongoing strategic advice on how to start and grow a business. If you work hard, manage your business wisely and follow the guidance of the franchisor, you will be more likely to succeed than if you were in business entirely on your own.
At its best, starting a franchise can help super-charge your progress as a business owner. Instead of having to build an entirely new business from scratch – creating your own brand, designing your own marketing strategy and making lots of strategic decisions about the company — buying a franchise can simplify the startup process and give you an established blueprint for how to succeed.
As a franchise owner, you can experience the best of both worlds of being an employee and an entrepreneur. You get some of the structure, support and guidance of a larger organization, but with the freedom and higher earning power of a business owner. If you decide to start a business as a franchisee, hopefully you’ll find your franchise fee a good investment in your future success.
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Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.