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Franchise Prospector » Money & Financing
How Much Money Do I Really Need?
Where does the money go?
By Bob Seay
The cost of opening a franchise may be lower (or higher) than you think
According to the International Franchise Association (IFA), almost 75% of new franchise owners can get into business for a total investment, including fees and operational expenses, of less than $250,000. The typical investment is usually in the $100,000 to $200,000 neighborhood, although totals vary. Some franchises require less than $10,000 to start, including the franchise fee and other operational expenses. Those who are interested in a more recognizable franchise may spend as much as 1.3 million dollars in fees, building costs, and other operational expenses before they see their first customer. Franchisors are required to list franchising fees and other operational expenses in their company's Uniform Franchise Offering Circular (UFOC).
Franchisors want their franchisees to succeed. To increase their odds of success, some franchises require prospective franchise owners to have a minimum net worth of as much as $200,000 or more in liquid assets or available financing. Net worth is defined as the total amount of your assets, including your home, any stocks or investments, or other items of value, minus your liabilities (the amount owed on your mortgage, credit card debt, or other money you owe). Liquid assets are those assets that can be quickly converted to cash, such as a CD or stocks. Your home is not a liquid asset as it cannot be quickly converted to cash.
Where does the money go?
Prices vary, but here are some typical costs for a medium-sized franchise:
- Franchise fee: $15,000 to $30,000
Prices vary, but most franchise fees cost $15,000 to $30,000. Fees are typically non-refundable, so be sure this is what you want before you put your money down. The fee for opening a single Papa John's Pizza restaurant is $20,000. Expect to pay $27,500 to get into Fast Bucks, a franchised check cashing service. Some fees may surprise you. Snap-On Tools is a very well known brand, yet the franchise fee is a low $5,000. The fee is only part of the package. Nutrition giant GNC franchises start at about $30,000. The company tells would-be franchise owners to expect to spend $132,681 to $182,031 to go into business.
Like any product, the law of supply and demand affects the price of a franchise. The franchise fee for GPNS Corporation, which offers franchise opportunities for Global Portable Navigation Systems, is an out-of-this-world $100,000. The $100,000 fee includes a $25,000 application fee, but does not include training, equipment, or other operational expenses.
- Building rent or lease: $1,200 to $6,000 for the first three months
Lease prices are set by the local market and will vary according to size and location, but can range from $500 to $2,200 per month. Most franchises required you to pay the first three months rent upfront.
- Building improvements and other construction costs: up to $20,000
Building improvements include any changes required to accommodate the business, including any modifications to doors, windows, countertops, or other parts of the building.
- Equipment: $5,000 - $30,000
Equipment includes anything you need to operate your business. Almost any franchise business will require cash registers, computers, and other office equipment. Other equipment needs will vary, depending on the nature of the business. For example, restaurant equipment would include refrigerators and stoves. An automotive service franchise might have specific requirements for tools and machinery. All equipment must meet with the franchisor's specifications. In some cases, equipment must be purchased from the franchisor.
- Furnishings and Fixtures: up to $40,000
Fixtures include tables, chairs, lights, any specialized displays, or other fixtures that may be required by the franchise.
- Signage: $2,000 to $7,000
Let people know you are open for business! Perhaps more than any other factor, signage makes you a recognizable franchise. Try to imagine a McDonald's without the Golden Arches, or a Subway Sandwich shop without the stylized Subway font and logo prominently displayed. This estimate includes indoor and outdoor signage.
Other Startup Expenses
- Opening Inventory: $20,000 to $40,000
- Advertising: $2,100-$9,000; (total for three months)
- Insurance: $300 to $500
- Training and travel expenses: $3,500-$6,500
- Opening Promotional Materials $5,000 - $10,000
Financing
Unless you are independently wealthy, you may need additional funds to get started. Financing a franchise can be tricky. Your local bank will probably not be very helpful, unless you have sufficient home equity, stocks, or other semi-liquid assets to cover the loan. Of course, if you have that kind of liquidity, then you probably don't need the loan.
If you have the necessary collateral, Entrepreneur Magazine advises securing a personal line of credit at a bank without mentioning that you considering opening a business. Opening a business, even a franchise, involves risk - something that makes bankers nervous.
Being turned down for a loan from one bank doesn't necessarily mean that you can't qualify for a loan. If you are turned down, you can still benefit by asking the
loan officer probing questions about the strengths and weaknesses of your loan package. The Small Business Administration encourages small business owners to turn a rejection into a learning experience. "Often a banker who declines your loan request can give you recommendations which will make it much easier to overcome potential concerns and succeed when making your next presentation."
Depending on your circumstances, you may also qualify for a loan from the Small Business Administration (SBA). Even though the franchisor is obviously not a small business (if they were, they wouldn't be franchising), your individual franchise may qualify for a SBA loan. The SBA reminds business owners that "Exhausting private sources of loans before seeking a governmental loan guarantee or direct loan is a necessary step… The government should be considered a secondary source of financing after private lending options have been explored."
Operational costs
Expenses don't stop once you open your doors. Once you're in business, you have to start paying salaries, replacing inventory, and incurring other standard business expenses. Other ongoing expenses include rent, utilities, and advertising. Your new employees may require training at your expense. If you took out a loan to buy your franchise, then you will have to make loan payments. Franchisees are required to pay a royalty to the franchisor, usually 3% to 9% of sales. This is an ongoing expense that continues for as long as you own the franchise.
Early operational costs may also include hiring an accountant and an attorney to ensure that every thing is on the up and up.
A good thing, if you can afford it
Successful franchises provide a better than average return on investment for the franchise owner. As with any business, there is some degree of risk. Only you can determine how much you can afford to spend - or to lose.
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