Franchising

When you start a new business or purchase an existing business you know exactly how much capital you will have to outlay, but when it comes to franchises. It becomes a little more complex. There are a few different franchise costs and to make sure that you do your due diligence, it is important that you are aware and understand each individual cost.

Franchise Costs Explained

There are five separate costs that you will need to consider when looking into the purchase of a franchise. Here is a list of these costs with a short description to help you gain a better overview of franchise costs.

1. Initial Franchise Fee

Every franchise has it's own initial franchise fee. Ranging from about $10,000 (for home based and internet franchises) up to over $1 million (McDonalds franchise, Krispy Kreme franchise and other famous fast food franchises), this initial franchise cost covers support, initial training and management, very much similar to the purchase price of an existing business. But there is no need to get to worried about having the full initial franchise fee upfront as many different payment options are usually made available to potential franchisees.

2.Setup/Build Costs

Not the initial franchise costs are only for the setup of the business systems that make the franchise unique. They do not include the capital required to set up a shop front and purchase the required office machines. You will need to budget this into your franchise costs analysis.

3. Legal Fees

Franchises have lengthy procedure manuals and contracts, much to complex for the average person. To complete the purchase of your desired franchise you will need to employ the services of a qualified solicitor that has experience with franchise contracts.

4.Ongoing Royalty Fees

This is the fee that most people seem to forget. When you purchase a franchise, you are really purchasing a license to use a companies brand and systems. This requires the payment of a recurring fee to be added to your franchise cost list, being made payable to the franchiser for the continual use of their systems.

5.Running Capital

The most forgotten franchise cost when people do their analysis is running capital. While you do not have to pay this out to anyone all at once, having a cash reserve is important as it provides cash flow as your business is still getting off the ground. This figure will be determined based on your own personal needs.

In purchasing a franchise, you are buying a proven business model and you will pay a premium. However, this does not mean that you shouldn't purchase a franchise. Now that you know the franchise costs, you are well equipped to complete the required analysis on any franchises that you are interested in.