How Much Franchise Capital Do You Need?

One of the most inviting aspects of starting a franchise is the promise of major growth and high returns without a ton of upfront investment. While this isn’t strictly the case with many top franchise opportunities, there is truth in the notion that you don’t need a ton of cash to select a franchise and get your business going, especially if you’re looking at opening up a fast food franchise. However, opening your own wing of a successful company isn’t as easy as it looks. If you’re serious about starting a franchise of your own, you’ll want to come prepared with a good amount of cash to account for the first few years of getting on your feet as a business. If you’re thinking about purchasing a franchise, here are the different upfront costs you should know about.

Franchise Fee

When you first make an agreement with your franchisor, you’ll be asked to pay an initial franchise fee. This can range anywhere from $500 (for an unknown brand) to a few million (for a McDonald’s or Taco Bell.) A big chunk of this is the money you put toward the location itself. This amount also varies, but usually falls somewhere between $25,000 and $35,000. When you sign your franchise agreement, you’re basically agreeing to pay a set sum of money (or one that’s adjusted over a period of years) for the use of the company’s trademark in return for a share of the profits. This agreement will also lay down some ground rules about how can and cannot run the business. For instance, the franchisor still has most of the control over how the business is run, but by paying your franchise fee, you’ll be able to make significant creative changes to how you manage your franchise location as long as you run it by your franchisor first.

Royalty Fee

A royalty fee is an ongoing payment you’ll make to your franchisor based on how much profit you make within a quarter or a period of time that you and your franchisor decide on. Since it often takes a year or so to see profit from a new franchise location, especially if it’s the first offshoot, the royalty fee can also be a fixed monthly or yearly amount you’ll pay to your franchisor until you start breaking even. Once you start paying a profit-based fee, the percentage should be about 5-6% of your gross yearly income. Again, how much you pay depends on the terms of your initial franchise agreement, so make sure you negotiate wisely.

Estimated Initial Investment

In addition to your franchise fee, you’ll most likely be required to put down some cash for products and services associated with the business. For instance, if you’ve purchased a fast food chain, you’ll need to buy your own equipment, uniforms, and stock yourself, in addition to anything else the franchisor sees as being crucial to the operation. Since consistency of the product is an important part of growing a successful franchise, these costs serve to help get your location up to standard before you open. However, if your franchisor is marking up your mandatory equipment to make a profit, it’s something you should know about. Before signing anything relating to these fees, do a quick search to see how much the essentials should actually cost. The base price of operating materials, from big machines to small stock items, will be a huge help in the long run, so it’s a good idea to familiarize yourself with the basic operational costs before you take anything on.

Advertising Fee

Advertising puts your new location on the map. If you’re opening up a franchise location of an already successful business, you’ll be able to use the business’s pre-existing marketing team to put the word out. However, in return for this service, you’ll be expected to fork over somewhere between 2 and 4 percent of your revenue. While this might seem steep, consider that a pre-established brand has a lot to lose when it comes to bad press or inefficient marketing. It also helps to think about how much time and energy is spent on crafting unique marketing campaigns that can draw business from a range of customer demographics. These fees also go toward the marketing division compiling raw data about trends and customer feedback that could be a huge help to you in the future. Think of your advertising fee as a way of outsourcing that works so that you can focus on creating a better business.