Cost is a critical consideration if you are looking to buy a franchise. Whether you opt for external guidance and support from an existing franchise or go it alone, starting your own business requires a significant investment. What is the average cost of owning a franchise? And What are related costs you should expect before purchasing a franchise?
Primarily, the purchasing cost of a franchise varies depending on the location of the business and the franchise system. Personal services or home-based franchises may be cheaper than those requiring premises, a fleet of service vehicles, or equipment. To find out more on this, visit Pirtek franchise costs.
What’s The Average Cost Of Owning A Franchise?
The average cost to purchase a franchise ranges from $18500 to $85500. These factors are franchise fees, equipment, working capital, and inventory. The cost widely varies as the location, size, and industry change.
In addition, franchises exist that fit all budgets. Basic concepts cost $10000 or less, while international brand names can get to $5 million or more. You should consider factors like the number of staff you need, retail premises, and brand recognition. Here are basic start-up costs necessary for a franchise business:
Franchise Fee
The franchisor will demand upfront payment from the prospective business owner. This gives you the right (or license) to use the business name for a defined period. In other words, a franchise fee acts as the ‘cost of admission’ that allows you to use the company’s business systems and brand. The fee covers site selection and development, assistance with staff recruitment, training, and initial promotions. Expect to pay a $5 000 to $50 000 franchise fee depending on the system.
Is the Upfront Fee Standard for all Franchisees?
No. it changes depending on the brand, the industry, and the type of business. In a few cases, the franchise fee may differ among franchisees of the same unit. Sometimes within the franchise group itself, for instance, when some territories are more lucrative than others.
Set-Up Costs
While the franchise fee covers franchisor guidance costs like selecting a business’s location, it fails to cover physical premises. That means you must budget for aspects like furniture, fixtures, inventory, and equipment in your set-up cost.
These are expenses you incur before your business opens and runs. In addition, the initial franchise costs may vary from one franchise to another. You can find low-cost franchise businesses (as low as $20 000), while other high-end ones cost millions of dollars to open. As a rule of thumb, service business runs at a lower cost than food or retail businesses because of real estate and buildout costs. Data from Franchise Business Review estimates start-up costs at $150 000.
Ongoing Fee
The ongoing fee may fall into two or more categories, including the following:
Management Service Fees
The management service fees account for the ongoing franchise support. It is calculated as a percentage of the franchisee’s sales, payable weekly in arrears. The fee may range from 1% to 7%, depending on the business type. For example, most retail-type operations like grocery chains have narrow profit margins, though they can achieve massive turnovers. In this case, exceeding the 1% management service fee can harm the franchise viability.
Marketing Service Fund
Franchisors may levy an additional fee to support marketing services (also called an advertising fee). This accounts for the national product advertising. This fee is paid in a different account administered by the franchisor. It doesn’t constitute the franchisor’s income. The fee can range from 0,5-3% of sales or is levied as a fixed fee.
Possible Renewal Fee
Generally, franchise agreements can last between 5 to10 years. The franchisee can extend this period for a similar duration but then has to fulfill additional conditions which may have financial implications. Before signing the initial franchise agreement, consider the following fees:
· Renewal Fee – franchisors may charge a renewal fee. This amount is often the same as the upfront fee. Earlier, you should know if a renewal fee is included, especially when working out the proposition’s long-term financial viability.
· Refurbishing Cost – franchisors customarily make the franchise agreement renewal conditional as the franchisees update the unit’s appearance. This helps the franchisor maintain the network’s image. However, you need to make provision for this. Some franchisors also charge monthly refurbishing costs, enabling the franchisee to save for this operation.
The importance of the franchise business is that you are well-informed regarding start-up and future costs upfront. Because of the experience with former franchisees, franchisors can provide an accurate picture of the cost of starting the business, ongoing expenses, and estimation of revenue streams—valuable input lacking in a personal business.
