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Why Are Some Franchises More Expensive Than Others?

By Michelle Cemental

There are many aspects that go into choosing the right franchise. One of the biggest concerns is the initial investment required to buy a franchise location. But this fee can vary greatly — even between franchisors in the same industry. The start-up costs for a new franchise can range from just a few thousand well into the millions.

For new franchise owners, it is not always clear why these large gaps exist. In this post, we will explore what your initial franchise investment goes towards and why cheaper may not always be better.

What Is Included in Your Initial Investment?

Before we dive into why there is such a gap in the initial investment cost across franchises, let's first define what the initial investment includes. When we talk about the initial franchise investment, we are going beyond the franchise fee, which is the cost paid directly to the franchisor for the use of the franchise system and related trademarks, etc.

This investment is the capital requirement that a franchisor sets for all potential franchise owners. It usually includes the franchise fee, setup costs, and additional assets, like working capital, that can help keep the business running until it becomes profitable. Depending on the franchise, it can also include costs such as land, buildings, furniture, equipment, office supplies, and, in the case of retail franchises, inventory.

Every franchise will have different financial requirements, so be sure to speak directly to a franchise sales associate for the investment requirements of a specific franchise system. The franchisor's Franchise Disclosure Document (FDD) will outline the requirements in detail.

Why Are Some Franchises So Expensive?

Building and Land

One obvious reason that a franchise might be more expensive is because of the construction and property required. For instance, paying for the construction of a hotel franchise location is going to be considerably more expensive than a home cleaning business. One requires a large investment into land and construction, while the other only requires renting a small office space. 

Support

Buying a franchise means buying more than just the name of a brand. Your initial franchise investment covers both startup training as well as the cost of ongoing training for you and your staff. The extent of this training can have an impact on those initial investment costs. Caring Senior Service, for instance, offers 100+ hours of initial training and regular ongoing training for its franchise owners. Other franchise opportunities may have training available upon purchase but might not offer ongoing training, which can be extremely valuable and have an impact on overall profitability.

Territory

Not all franchise territories are created equal. Some territories may leave you faced with steep competition while others may have little to no competition. Further, the geographic area sizes of different territories can be extremely different depending on how densely populated the region is. These territory differences can certainly have an impact on how much a new franchise owner will have to spend.

Single vs. Multi-Unit Deal

About 53% of franchise owners have more than one location. Many franchisors offer discounted rates for current franchise owners who are buying a new location and for new franchisees who purchase multiple territories at once. This can be a great savings option.

Brand Recognition

Getting residents and potential customers to know about your brand is one of the biggest struggles a new business faces. For a franchise owner, much of that struggle can be eliminated because of existing widespread brand recognition. The more recognizable a brand, the more leverage that company has in charging a higher franchise fee. Of course, brand recognition is not always positive. Some brands have been around for so long that they have acquired as many negative associations as positive ones.

These are only a few of the reasons for the wide range of initial franchise investments you will find during your research. It is important to keep in mind that while you should be prepared for the cost of the franchise you choose, the initial price is not necessarily indicative of how successful your business will ultimately be. To learn more about our franchise opportunities and costs, reach out to our team.

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Tags: Finances, Franchise Ownership