What Kind of Investment is Required to Buy a Franchise?
Posted on November 12, 2010 by My Franchise Law
When considering whether purchasing a franchise is right for you or not, it’s important to keep in mind the financial investment required to get a new franchise off the ground, along with its recurring operational costs. But how much will that be? Here’s a basic outline of expenses to take into account:
The franchise fee: As part of your initial agreement, one of the first expenses you will encounter as a new franchisee is the franchise fee. This is an upfront payment made to your franchisor for the use of the franchise name and blueprint, and in some cases, it covers the cost of training, support, leasing assistance and setting up the business. For most mainstream businesses, this fee can be anywhere from $20,000 to $50,000 (though some smaller, home-based businesses may be less). The franchise fee is one of the first things you should consider when you are looking into buying a franchise, to determine if it will be within your budget to pursue the business any further.
Lawyer’s fees: You should also consult with an experienced franchise attorney before you sign any documents, in order to protect yourself from one-sided contracts. Your franchise attorney will help you go over the initial Franchise Disclosure Document, and review the subsequent franchise agreement. Franchise lawyers’ fees can range from $1,000 to more than $5,000 (depending on hourly rates), so it’s best to get an estimate up front. Also, find out how much past clients ended up paying, on average, for the lawyer’s assistance.
Start-up expenses: Once you have leased your location and are ready to set up the business, there can be substantial expenses involved. From new equipment, to renovations, to furniture and fixtures - you will have to be able to finance all of these additions and improvements long before you see a dime of revenue. It’s important to get an estimate of the average expense of these start-up costs before you invest, so that you can secure enough financing to sustain the business until you see revenue.
Inventory and Supplies: When starting a franchise business, you will have to ensure that you are well-stocked and prepared to meet customer demand from day one. This means purchasing enough inventory and supplies to get started, and can include everything from office equipment and paper products to food and beverage essentials. Again, you will want to know what you are looking at before you start, so ask for an estimate before you sign the contract.
Working Capital: You will also need to have enough money set aside to ensure that the franchise business continues to run smoothly as you head towards profitability. Many new franchisees will not see any revenue until a year after opening, so it is important to have enough money set aside to cover all of the franchise’s day-to-day expenses for at least that length of time.