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?
Let's first define what the initial investment includes, because it's more than your initial franchise fee. It includes all of the costs that you will need to maintain your businesses for at least the first few months.
Here are some of the things that your initial investment may need to cover:
- Franchisee fee: This initial fee is a flat fee paid directly to franchisor for the use of the franchise business model and related trademarks, etc.
- Working capital: Working capital refers to the money used in day-to-day operations. You will need enough funds to pay staff and keep up with bills until the business becomes profitable.
- Office space: Depending on your franchise, you may need to purchase land and even construct a new building. Other franchises may allow for office rentals.
- Equipment: You may need to purchase technology, office furniture, inventory, or other equipment to support your new business.
- Travel: You may be asked to travel to corporate headquarters for training. Your staff may also be asked to attend training, and you may be responsible for the costs incurred.
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?
Now, let's dive into some of the variable costs that can drive up the initial investment for a franchise business.
Building & Land
One obvious reason that a franchise might be more expensive is because of the construction and property required. Finding and developing a suitable location for a franchise can be a complex and expensive process. But not all franchise opportunities require you to build new.
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.
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Support
Buying a franchise means buying more than just the name of a brand. Your overall investment should cover 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. Some may charge for ongoing training, which can impact 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.
If you're a business owner who's planning to expand, it's a good idea to include those costs in your business plan.
Brand Recognition
Getting residents and potential customers to know about your brand is one of the biggest struggles of starting a business. 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.
Marketing
Your initial investment should also include marketing materials to help your office build local brand visibility. Your franchisor may provide you with business cards, flyers, banners, and other materials to pass out locally. They might also include digital campaigns, like social or search ads.
However, if your franchisor does not cover the cost of these items, that's another expense you should plan for. Marketing can get the word out quickly about your new small business.
It's also worth noting that many franchise systems include a marketing fee as part of their franchise agreement. This fee is similar to a royalty fee, but the funds to into a national advertising fund that the franchisor may spend at their discretion.
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The Bottom Line
These are just a few examples of why the franchise investment can very so greatly. It's important to be prepared for the cost of the franchise you choose.
However, remember that the initial price is not necessarily indicative of how successful your business will ultimately be. You could still be extremely successful in a franchise that requires an investment of $150,000 compared to one that requires $1,500,000.
To learn more about our franchise opportunities and costs, reach out to our team.
