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2010
By Christopher Freeburn

 

You have done your homework and decided that a buying a franchise is the best way to start your own business. You've researched the franchise industry, decided what type of franchise best fits you and maybe even narrowed down your list of potential franchises to a handful, or perhaps even just one. Now you want to know: how much will this all cost?

Answering this question depends on two issues. First, which franchise you choose; and, second, the material costs of getting started.

Paying to join the team
If you plan to open a popular franchise retail store, restaurant or coffee shop, you are looking at considerable initial costs in addition to whatever franchise fee the franchisor charges. The franchise fee is the upfront investment in the franchise. Fees vary from as little as $2,500 to more than $50,000. The franchise fee gives you the use of the franchise name and products or services. While that may sound low, the franchise fee is almost incidental when factoring in all of the other costs associated with opening a franchise.

In addition to the franchise fee, most franchisors demand a percentage of your profits assessed on a periodic (usually monthly) basis. This is the royalty fee for using the franchise name. Domino's Pizza, for instance, charges its franchisees a royalty fee of 5.5 percent of weekly sales in addition to the initial $25,000 external franchise fee, and requires additional fees from franchisors for its regional advertising campaigns. In exchange for these fees, and depending on the franchise, you will receive access to marketing and training materials, the right to operate your franchise in a specified geographic location (without competition from other franchisees), training and other support from the franchisor.

The real bottom line
Beyond the franchise fee, there are other costs, including supplies, space to run the business and marketing expenses that will be required to get the franchise up and running. These expenses will vary among franchise options. For example, franchisedirect.com estimates that the total initial investment needed to start a Domino's ranges from $120,000 to $461,700, depending on the site. Of course, some franchise operations can be run from your home, in which case there will be no need to purchase or rent a location. Others require a simple storefront. Some others require a considerable investment in location, including internal décor, lighting, equipment and furnishings according to franchise specifications.

Some franchisors will help you find a location for the business; others expect you to do that on your own. In either case, you will be expected to pay for the rental or purchase of the location. Some franchisors will help you find financing, if you qualify; most won't. Be warned, some franchisors are very exacting about the appearance of their franchise locations and will demand to inspect and approve your choice of storefronts before finalizing the agreement.

Finally, there will be the cost of acquiring any products or equipment associated with your franchise's operation. This can become quite expensive, depending on the franchise. When considering which franchise opportunity to explore, all of these costs must be taken into consideration.

 

For example, some online franchise directories estimate that to open a Desert Sun tanning franchise, in addition to the $50,000 franchise fee, a franchisee can expect to spend between $200,000 to $427,000 to acquire the needed tanning beds, UV-Spray booths, neon signage, marketing materials, satellite music, lotion, insurance, and cleaning equipment, required to open a Desert Sun Tanning Salon. For The Athlete's Foot, a popular sports shoe vendor, total start-up cost estimates range between $200,000 and $640,000, inclusive of storefront, supplies and equipment costs.

Similarly, opening a Ben & Jerry's Scoop Shop franchise could cost somewhere between $200,000 and $385,000, depending on the region of the country, once costs plus their $32,000 franchise fee are counted.

Does your financial portfolio measure up?
The cost of opening a store is so great that many franchisors set specific financial requirements that would-be franchisees must meet just to be considered for a franchise agreement. Ice Cream giant Carvel charges a $30,000 franchise fee to open a full Carvel store, but the costs of purchasing the property and equipment are such that, according to its company website, Carvel will only consider franchisees who can demonstrate a net worth of at least $300,000, with at least a third of that available as liquid cash. The greater the cost of starting up a franchise, the higher the financial requirements will be. Bally Total Fitness states on its website that it will only consider franchisees with at least a combined $800,000 in assets; the International House of Pancakes (IHOP) similarly demands a minimum combined net worth of $1.5 million and $500,000 in liquid assets.

There are, however, less expensive franchises out there. Jackson Hewitt Tax Service franchises can be established for between roughly $50,000 and $85,000, including fees. Rival Liberty Tax Service franchises cost even less, with start-up expense estimated at $56,000 to $70,000. RE/MAX real estate franchises run between $35,000 and $200,000, depending on how you operate the franchise. JAN-PRO commercial cleaning franchises cost a remarkably low $5,000 to $50,000 to start, again depending on the extent of operation. With more than 2,300 franchises available in the U.S., there are a wide variety of franchise opportunities at almost every level of financial investment.

(To find out more about the initial fees, royalty sales percentages, and estimated start-up costs involved with the major franchises listed in this article as well as hundreds of others, check out the individual company websites as well as online franchise directories like http://www.franchisedirect.com and http://www.thefranchisemall.com.)
By Max Berry

For an entrepreneur looking to take their business as far as it will go, becoming a franchisor may be the ultimate goal. And, since franchisees provide the capital for expansion, a business can grow more rapidly as a franchise than it would through internal funds, equity financing, or bank loans. But franchising a business takes much more than entrepreneurial drive; it requires planning, patience, and, above all, a killer concept.

Are You Ready?
Before a small business owner takes the first steps toward becoming a franchisor, he or she must determine whether or not their business can sustain that kind of expansion. "A lot of businesspeople are so eager to cash in that they do it before they have a successful concept," says Dr. Robert Barbato, a business professor at the Rochester Institute of Technology.

To attract franchisees, you need to provide them with a product or service that has already been proven successful in your own market. The clearer and more refined your business mode--the more you have tested and honed it through experiences with your own clients--the better your chances of both attracting franchisees and setting them up to attract clients of their own.

Barbato cites the highly successful short-term car rental company Zip Car as a prime example. Founded and developed in Boston, the service caught on quickly as a franchise because it satisfied a need--the use of a car for a day, or even just a couple hours--that was prevalent in nearly every city. "It's a case of seizing an opportunity that may come and go quickly," says Barbato. "And it has to be opportunity that like the Zip Car can be replicated."

But replicating isn't in the nature of every small business owner. To become a franchisor is, to some extent, to ease up on the reins and let other people take hold of your idea. Understanding the distinction between entrepreneur and brand manager is imperative for any small business owner considering becoming a franchisor. For those entrepreneurs uncertain whether or not franchising is the next logical step for their business, Barbato recommends letting the trajectory of the business itself be a guide.

"A franchisor knows he or she is ready when the opportunity is so large it can't be funded by internal financing," he says. In other words, if the demand for your offering has outgrown your ability to meet that demand on your own, you're ready to franchise.

 

Beginning the Process
This first step to turning any sole proprietorship into a successful franchise is brand credibility. A litmus test for knowing whether or not your business has legs as a franchise may be the reaction you get from your customers when you ask them for testimonials about their experience with your product.

 

But along with a strong reputation comes a recognizable trademark. Develop and register one of your own. A key draw for potential franchisees is an association with, and stake in, an established brand.

Once your brand is in place, devise a formal franchise plan. Laws regarding franchising vary between states, so check yours to determine all the steps you'll need to take. "Laws are very protective of franchisees," says Barbato. "They want to make sure franchisors are being transparent, so managers need to be prepared for that." (To get a sense of the franchisee's perspective on buying a franchise, check out the Federal Trade Commission's Consumer's Guide to Buying a Franchise, here: http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv05.shtm.)

Being transparent in this instance means drafting a formal operations manual and training programs for your franchisees, as well as clear, up front explanations of all franchise fees. Some states also have specific laws that require franchisors to provide pre-sale disclosures, known as "offering circulars" to potential franchisees (For a list of these states, go here: http://www.ftc.gov/bcp/franchise/netdiscl.shtm.) A franchise attorney can help with all of this, but you should check your own state's franchise laws before determining whether or not you need one.

More than anything, the information you distribute to potential franchisees should stress the most important component of your operation: its product. "A lot of good franchises have as their goal selling products, but then there are those that the have the goal of selling franchises," Barbato says. "An emphasis on products and services is what distinguishes a good franchise from a bad one. That's what savvy franchisees will go for."

A New Role
Still, not every entrepreneur will find happiness as a franchisor, and even those that do will need to make some serious adjustments to the way they approach their business. Becoming a franchisor means taking a broader view of your company. Where the daily minutia of a small business was once your stock and trade, you now must focus your energies on the big picture: marketing on a grander scale, drumming up interest in your brand, and selecting the right franchisees to take your company national.

"We have a tendency to hire people like ourselves, but, as a franchisor, you have to guard against that tendency," says Barbato. "You're actually selecting qualified managers, not entrepreneurs; people who can follow the manual and execute strategy. You're not looking for the creative risk-taking type, you're looking for the administrative, managerial type."

That leaves you with the task of devising and implementing the processes by which these managers operate, creating the plays for your team to execute. "It is now a case of finding systems and processes that work," says Barbato. "You want to start becoming a process person."

This transition isn't always an easy one for a small business owner who nurtured their company from idea to enterprise, but the path from sole proprietorship to national franchise marks an evolution, not an ending. "Franchising requires the ability to migrate into the role of a successful businessman," says Barbato, "not just an entrepreneur."

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