Costs of buying a franchise

Buying a franchise is a major investment. You should expect to draw on almost all of your financial resources and/or take on additional lines of credit. Before start talking to franchisors, have these questions answered:

What is your net worth? How much of that is liquid (accessible cash)?

How much can you afford to lose? (Remember - nothing is guaranteed.)

Is your credit rating favorable?

Do you have sources of additional financing if they become necessary?

Do you have alternative income that you can live on while starting your franchise?

There are two main costs associated with buying a franchise. The first, which is most likely to cause sticker shock, is the franchise fee. This is a one-time startup fee that can range be as low as $1,000 or as high as $100,000. Most are between $20,000 and $30,000, and some are non-refundable, even if you decide to pull out of the deal before opening your franchise.

The second major cost is the monthly royalty payment. This fee ranges from 3% to 6% of your gross monthly sales. Some franchises have monthly minimums that can really hurt during slow periods for your business.

Other costs vary almost limitlessly, depending on the industry and the specific franchise. Some typical expenses include:

• Location. Most franchises need a place to do business - some contracts mandate corporate-controlled leases, others allow you to set up your own lease.
• Equipment. Could be anything from food preparation equipment to vehicles to display cases to cash registers.
• Signs. Many franchisors will specific exactly what type of signs you have to buy.

• Opening inventory. You may need weeks' worth of inventory to open.
• Working capital. For expenses that accrue before you start generating revenue - pre-opening payroll, for example.
• Advertising fees. Larger franchisors typically require that you pay into a national advertising fund that goes to support the company as a whole.

Because franchise opportunities cover such a gamut of industries and business models, the total investment can range from as little as $30,000 to as much as $3,000,000 or more. That said, a more typical total investment is $200,000 to $400,000.

Remember that not all franchises require such a hefty investment - search around for opportunities that fit your budget. However, you should also be prepared to take on loans and/or borrow money from other sources.