Starting a franchise involves a number of costs that you'll need to consider before diving in. In this article, I’ll cover everything from initial franchise fees and ongoing royalties to the costs of setting up your physical location and hiring employees.
By anticipating these costs you'll be able to create a realistic business plan and determine your financial needs before you invest. This will help plan financially, make the right franchise decision, and finance your franchise with a lender.
Whether you're considering a franchise as a career change or as a means to passive income for your retirement, this checklist will help you on your journey.
Let's get started!
Franchise fee and ongoing royalties
These fees represent a significant financial investment. Let’s take a look at each:
- The initial franchise fee is a one-time payment that you'll need to make when you first join a franchise. This fee gives you the right to use the franchisor's brand and operating system, and it typically covers training, support, and access to proprietary systems and materials.
- Ongoing royalties are a percentage of your gross sales that you need to pay a franchisor. Not all franchisors charge royalties. Franchisors who charge for royalties typically use these funds in part to fund ongoing marketing and support, which in turn benefits you. If the franchise you like requires royalties, it's important to remember that this is an ongoing cost that you'll need to include in your budget for as long as you operate your franchise.
Not all franchises work in all locations. Sometimes, real estate or labor expenses will make a franchise nonviable in certain areas once you take ongoing royalties into account.
When you create a budget and financial projections for your business, you may decide that a franchise isn’t worth the fees.
In this case, congratulations on saving yourself from a bad investment! You can now research a new franchise with a more affordable cost structure.
Or, perhaps when you run your projections, you’ll come up with an entirely different picture and decide to keep moving ahead with your franchise idea!
Rent, construction, and taxes are all part of the expenses related to your franchise location.
- Rent or lease payments: This ongoing cost will depend on the size and location of your space, as well as any amenities or services included.
- Construction and build-out costs: You may need to make renovations or build-out your space to suit your franchise. This often involves installing fixtures, painting, or even updating electrical or plumbing systems.
- Property taxes: Taxes will depend on the value of your franchise location and your local tax rate.
A longer-term lease may offer stability and lower monthly payments. A shorter-term lease may offer flexibility, but come with higher monthly payments.
You may be able to negotiate the length of your lease, the monthly payment, whether you or your landlord are responsible for paying for repairs, and what kinds of alterations you can make to the space. Landlords are often more willing to negotiate if you can show your long term value as a tenant. You can do this by showing a solid business plan and a good credit score.
If you're unable to reach an agreement on the monthly payment, you may be able to negotiate a contingency plan. For example, you could agree to a higher monthly payment with the option to revisit terms after a certain period of time.
You'll need to pay your employees in exchange for their time and work. Let’s take a look.
- Salaries and wages: Competitive wages will help you attract and retain quality employees. Wages will vary based on your employees’ experience and qualifications as well as industry standards and local legal requirements.
- Employee benefits: You may need to offer benefits to your employees such as health insurance, retirement plans, and paid time off. The franchise you’re considering will often have standard practices for benefits outlined in the Franchise Disclosure Document (FDD).
- Employee perks: Perks help you retain quality employees and get the most from your team. They’re a great way to boost morale and productivity! Perks can include bonuses, recognition programs and employee development opportunities.
- Employee training: Training ensures your employees have the skills to succeed in their roles. Training includes orientation, onboarding, ongoing education, and leadership development.
- Employee recruitment: Hiring and retaining great employees is crucial to your success. Job postings, recruiting agencies, and employee referral programs can all pay for themselves if they bring you the best candidates.
- Payroll taxes: In addition to salaries and wages, you'll need to cover payroll taxes including federal and state income tax, Social Security tax, and Medicare tax. You'll also need to pay unemployment insurance taxes and workers' compensation insurance premiums. (Fun stuff…)
- Payroll administration: Make sure to budget for the cost of payroll processing, payroll reporting, and tax compliance. You may choose to handle these tasks in-house or outsource them to a payroll service provider.
Equipment and inventory
Once your franchise space is built out, you’ll need to stock equipment and inventory.
- Computers for point-of-sale systems, accounting, customer relationship management, and other office work
- Furniture like desks, chairs, and tables
- Machinery or tools that your employees will need to operate the franchise
- Inventory, which can include raw materials and finished goods. When budgeting, consider the cost, storage, and turnover of your inventory.
Usually your franchisor will pay most or all of your technology licensing fees. However, some franchisors require franchisees to pay these.
- Point-of-sale (POS) systems
- Inventory management and ordering systems
- Customer relationship management (CRM) software
- Security and surveillance systems
Surely, your employees will need some supplies. So let’s budget for these.
- Employee uniforms
- Personal protective equipment (PPE)
- Charging or fuel costs for company vehicles
If your business prints, ships or mails materials, then you’ll want to budget for some office supplies too.
- Office basics and stationery
- Printing and copying costs
- Packaging and labeling costs
- Shipping and delivery charges
Many franchisors require franchisees to undergo training before they can open their doors. This can include on-site training at the franchisor's headquarters, online courses, or local workshops.
- Training and support costs: Franchisors may charge a fee for training materials and instruction. Or they’ll cover part (but not all) of your expenses.
- Travel and transportation costs for training: If your employees need to travel to a location, you might need to cover transportation and lodging.
Insuring your franchise is crucial to protecting your business and your assets. Consider a variety of insurance policies to cover different risks.
- Liability insurance protects your franchise against claims from vendors or customers related to injuries or damages.
- Property insurance covers damage or loss to your physical location and business-owned equipment or machinery.
- Workers' compensation insurance covers medical expenses, lost wages, and other costs for employees injured on the job. This is required in many states.
- Business interruption insurance provides financial assistance if your franchise is forced to close due to a covered event, such as a natural disaster or another pandemic. Interruption insurance covers lost income and ongoing expenses during the interruption.
- Product liability insurance protects against claims related to injury or damage caused by your products. Pretty important.
- Cyber liability insurance covers the cost of notification, credit monitoring, and other expenses related to a cyber event or data breach.
- Professional indemnity insurance protects against claims of professional negligence or errors. This is useful for professional service franchises that offer coaching or consulting.
- Vehicle insurance covers repair costs in the event of accidents or damage to vehicles while they’re conducting company business (whether the vehicles are owned by you or your employees).
Marketing and Advertising
Review the FDD of the franchise you’re interested in to see what marketing and advertising expenses the franchise will cover and what expenses you’re expected to pay.
Typically a franchise will cover national market research, branding, website development, content marketing, and advertising. This will give you a huge advantage over local businesses that need to set up all of this independently.
As a franchisee, plan to cover the costs for:
- Printing materials for brochures and flyers
- Running ads in local news media and social media
- Sponsoring or appearing at local events
You'll need to pay for utilities to run your franchise.
- Telephone service
- Credit card processing fees
- Cable or satellite television
- Recycling and waste removal
- Inventory warehousing
Legal and professional fees
You may incur expenses for work like incorporating your business, drafting contracts, or seeking advice from an attorney.
- Legal and professional fees for assistance with contracts, employment law, and regulatory compliance
- Permits and licenses, usually including a business operating license and a building permit, with additional licenses needed depending on your industry and location
- Accounting and bookkeeping fees, typically costing a few hundred to a few thousand depending on the complexity of your business
In addition, you’ll want to plan for taxes. You'll want to plan for:
- Income tax
- Sales tax
- Payroll tax
Maintenance and Repairs
To keep your franchise running smoothly, budget for ongoing maintenance and repairs.
Here are some items that may need attention in your franchise:
- Renovations and upgrades to your physical location
- Building upkeep
- Equipment and machinery repairs
- Vehicle maintenance
- Technology and software updates
- Plumbing repairs
- Electrical repairs
- HVAC maintenance
- Signage and lighting upkeep
- Pest control services
- Safety equipment inspections
- Furniture and fixture repairs
- Janitorial and cleaning supplies
- Security system troubleshooting
As you set up your budget, you may want to consider investments that can help your business be more sustainable. These might include:
- Energy-efficient lighting and appliances
- Water conservation measures
- Waste reduction and recycling programs
I don’t recommend restaurant franchises in part because of the additional kitchen related maintenance they require, including maintenance on each location’s refrigerator, freezer, ice machine, water filtration system, oven, stove, dishwasher, and, of course, soft-serve machines.
This is just a general list. The specific costs you'll encounter will depend on the type of franchise you start and the location where you operate.
For any franchise you’re interested in, read the franchise’s FDD and ask the franchise representatives questions to fully understand the costs involved.
To get an even better understanding of costs, ask other franchisees with experience operating to review your estimated expenses. They can often bring a lot of insight beyond what the franchise shares with you.