Franchising is by no means an uncommon venture for entrepreneurs in the US: According to Statista, there were nearly 800,000 franchises in the country in 2022, collectively generating almost $830 billion, about 3% of the nation’s GDP.
Operating a franchise can be an exciting and potentially lucrative business venture, but it’s important to understand the costs involved before diving in.
Franchising offers unique opportunities for entrepreneurs to start their own businesses with established brands and proven business models.
When you become a franchisee, you gain access to a support system that includes training, marketing assistance, and ongoing guidance from the franchisor. However, this support comes at a cost.
That’s why, in this article, we’ll explore the various expenses associated with operating a franchise, including franchise fees, additional costs, and financing options, so that you can have a clear understanding of what it takes to own a franchise and whether it's worth the investment.
What Is a Franchise Fee and What Does It Cover?
One of the primary expenses associated with operating a franchise is the franchise fee, which tends to run anywhere between $10,000 and $50,000. This fee is paid to the franchisor upfront and covers:
- The right to use their brand name, trademarks, and operating system
- Initial advertising and marketing expenses
- Staff training and other general expenses
The franchise fee tends to vary widely depending on the brand, industry, and location. It may also cover ongoing support and access to resources such as marketing materials and software.
It’s important to note that the franchise fee will not be the only upfront expense you’ll be expected to pay: You’ll also be responsible for incurring expenses for:
- Physical adjustments to your location
- Material sourcing
- Building and construction
Therefore, you shouldn’t look at the franchise fee as the only upfront expense you’re expected to pay: The true costs of becoming a franchisee when all is said and done can run upwards of $150,000, after taking the aforementioned costs into account. More on this later.
Factors That Affect Franchise Fees
Several factors can influence the franchise fee for a particular brand. The popularity and reputation of the brand play a significant role, as well as the demand for franchises in a specific industry.
Additionally, the size of the territory you'll be operating in and the level of support provided by the franchisor can impact the fee.
It's important to carefully evaluate the value you'll be receiving for the franchise fee.
Consider the following:
- The strength of the brand
- The level of support provided
- The potential for success in your chosen market
While a higher fee may initially seem daunting, it may be justified if it comes with a well-established brand and comprehensive support system.
Typical Franchise Fees for Different Industries
Again, franchise fees vary significantly based on the industry. Some industries have higher barriers to entry and require a more significant investment, while others may have lower upfront costs.
Here are some examples of typical franchise fees in different industries:
- Fast Food Restaurants: Franchise fees for popular fast-food chains can range from $10,000 to $50,000 or more. These fees often include initial training and ongoing support from the franchisor.
- Retail Stores: Depending upon the brand and size of the store, franchise fees for retail businesses vary widely. Fees tend to land anywhere between $10,000 to $100,000 or more.
- Service-Based Businesses: Franchise fees for service-based businesses, such as cleaning companies or home repair services, can range from $5,000 to $50,000 or more. These fees typically cover training and support for starting and running the business.
It's important to note that these figures are just rough estimates, and actual franchise fees can vary based on the specific brand and location.
Additional Costs Involved in Operating a Franchise
While the franchise fee is a significant expense, there are additional costs to consider when operating a franchise. These costs can vary depending on the industry, location, and size of the business.
Here are some common additional costs you may encounter:
- Royalty Fees: Most franchisors require franchisees to pay ongoing royalty fees, typically a percentage of their revenue. These fees contribute to the ongoing support and resources provided by the franchisor.
- Marketing and Advertising Fees: Franchisees often contribute to a national or regional marketing fund to promote the brand. These fees can range from a few hundred dollars to several thousand dollars per month.
- Equipment and Inventory: Depending on the nature of the business, you may need to invest in equipment, fixtures, and inventory. These costs can vary widely depending on the industry and the specific requirements of the franchisor.
- Lease or Real Estate Costs: If you don't already own a suitable location, you'll need to consider the cost of leasing or purchasing real estate. This can be a significant expense, especially in high-demand areas.
- Staffing and Payroll: You'll need to budget for employee salaries, benefits, and training. Labor costs can vary depending on the industry and the local job market.
- Payment Processing: Chances are your franchise will accept credit and debit card purchases. Don’t forget to overlook this often-forgotten chunk of overhead: Surcharge fees can range anywhere between 1.70% and 3.05%, a cost you’ll likely have to pass down to your customers.
It's crucial to carefully consider these additional costs when evaluating the total investment required to operate a franchise.
Examples of Healthcare Franchise Costs
Now, let’s look at the healthcare industry as an example of franchise costs. Healthcare franchises, such as senior care or medical staffing services, offer rewarding opportunities but often require significant investments.
Here are some estimated costs for healthcare franchises:
- Senior Care Franchise: The franchise fee for a senior care franchise can range from $40,000 to $80,000. Additional costs, including training, licensing fees, and marketing, can add up to a total investment of $100,000 to $200,000.
- Medical Staffing Franchise: The franchise fee for a medical staffing franchise is typically around $35,000 to $50,000. Additional costs, such as office space, employee salaries, and marketing, can bring the total investment to $100,000 to $150,000.
- Dental Franchise: Expect to pay about $50,000 in franchise fees when you open a dental franchise. Examples of practices offering franchising opportunities include Primary Dentist and FLOSS.
Remember, these figures are only estimates, and actual costs may vary depending on the specific franchise brand, location, and other factors.
Calculating the Total Investment Required for a Franchise
Determining the total investment required to operate a franchise can be a complex task. It's essential to consider all the costs mentioned earlier, as well as any other expenses specific to your chosen industry.
To calculate the total investment, you'll need to add up the franchise fee, additional costs, and working capital.
Working capital refers to the funds needed to cover ongoing expenses until the business becomes profitable. It's important to have enough working capital to sustain the business during the initial months or even years when revenue may be low.
To accurately calculate the total investment required, it's recommended to consult with a financial advisor or accountant who has experience working with franchises. They can help you analyze the costs and create a realistic budget for your venture.
Financing Options for Franchisees
Once you have a clear understanding of the costs involved, you can explore various financing options to fund your franchise. Here are some common financing options for franchisees:
- Bank Loans: Many banks and financial institutions offer loans tailored to franchise businesses. These loans may require collateral or a personal guarantee and typically require a solid business plan and financial projections.
- Personal Savings or Retirement Funds: Instead of going into debt, you may choose to use your personal savings or retirement funds to finance your business. This option eliminates the need for external financing but carries personal financial risks.
It's important to carefully evaluate each financing option and consider the associated costs, interest rates, and repayment terms. Consult with a financial advisor to determine the best option for your specific situation.
Cutting Franchise Costs, One Transaction at a Time
Operating a franchise can be a rewarding and profitable business venture, but it can be a lot to take in.
Thoroughly understanding the costs involved before making a decision can be difficult, and it can be easy to overlook other expenses that go beyond the franchise fee.
To optimally reduce your franchise overhead, don’t forget about the small stuff that adds up over time. Credit card surcharge and other payment processing fees are exactly that.
You may not realize how much money you’re leaving on the table until your bottom line starts taking a hit, and it’s better to prevent excess expenditures in the first place than absorb them and try to navigate your way out later.
Nadapayments can help you start your franchising journey the right way by identifying these fees and handling them accordingly, boosting your bottom line and keeping your hard-earned money in your pocket.