The Costs Involved With Being a Franchisee

A Guide to Franchise Financing

By TRACY BARBOUR

If you're looking to purchase a franchise instead of starting your own business, you'll find a wide range of start-up costs to consider. The costs of becoming a franchisee vary depending on the type of franchise, the franchise fee and start-up costs.

The initial franchise fee will be determined by the profitability of the business. This is a one-time charge that gives you access to the franchisor's business concept, training program and other benefits. According to Entrepreneur Magazine, the franchise fee for most companies is based on a sliding scale that can range from $4,000 to $20,000 - and up to $50,000, in some cases.

Besides this up-front fee, there will also be an ongoing royalty fee of 3 to 8 percent and marketing and advertising fees. Other costs involved with a franchise may include, costs for buying land, leasing or owning a facility, equipment, signs, opening inventory and working capital to pay your employees, utilities and other operating expenses.

Ben & Jerry's Ice Cream Franchise, for instance, has a total start-up cost of $250,000 per shop. Its franchisee fee is on a sliding scale from $9,000 up to $30,000. Royalties are 2 percent of gross sales, and a mandatory 4-percent marketing contribution is required.

Based on the typical total initial investment, the most expensive franchise to purchase is in the lodging category ($6,600,000), according to the Annual Franchising Industry Overview of the Bond's Franchise Guide. This is followed by full service restaurants ($ 770,000), fast food ($270,000), and automotive service ($ 208,000). These figures take into account the size of the land parcel required to accommodate the building.

Other Requirements To Consider

In addition to actual fees, some franchises have other stipulations relating to the owner's assets and expertise. For example, Ben & Jerry's Ice Cream, requires owners to have managed or owned a business within the last 10 years. It also requires a minimum net worth of $300,000 (excluding residence), of which $120,000 must be liquid.

Schlotzsky's Deli Franchise has similar requirements. It stipulates that first-time or singe-unit operators must have successful background in business or franchise ownership, management experience in food or retail within the past five years, $125,000 in liquid assets and a net worth of $400,000.

Getting Help Financing A Franchise

If you need help financing a franchise, there are a variety of possibilities. You could take on a financial partner who could also be an operating partner. You could also seek financial funding from the government. The Small Business Administration's Franchise Registry is a good place to start. This is a central registry of franchise systems eligible for SBA loan guarantees.

To use this program a franchisee requesting SBA financial assistance simply needs to provide a one-page certification from the franchisor stating that the prospective franchisee's contract is the same as the form approved by the registry originally. From there, you can work with the SBA to secure the financing you need.

If you're a veteran, the U.S. Department of Veteran Affairs may be able to provide you with funds though its Veterans Financial Franchise Initiative (VetFran). The program, initiated in the early 1990s as a way for franchisors to thank members of the military for their service during the Gulf War, allows service members to pay only 10 percent or less of the total initial investment cost of purchasing a franchise.

The difference between the required franchise fee and what the franchisee has available to invest is contributed by the participating franchisor as part of an "initial earned equity". Currently, VetFran is limited to franchises with initial investments which are $150,000 or less.

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