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Guide to Franchise Purchase Costs

By Daniel Kehrer
Where to find details on franchise buy-in fees and expenses

The cost of buying a franchised small business is hard to pinpoint. Nearly all 2,500 franchises operating today have different fees and expenses. Initial fees alone range from a few thousand dollars to millions. The good news is that franchises, with their wide range of price points, offer abundant opportunities at all levels.

The initial fee can range from around $5,000 for some sports and recreation franchises to $6 million for hotels. Fast food concepts range from $150,000 to $3 million. Different operating models abound. While 93 percent of franchises are stand-alone establishments, others include kiosks, home offices, express stores and mobile units.

Franchise buy-in costs vary because:

1) Even within a single industry, business types differ – such as a car wash or repair shop, both in the auto segment.

2) Expenses – such as training or buying supplies – vary greatly by business.

3) Some franchised businesses include a specific territory that can be small or very large.

Action Steps

The best contacts and resources to help you get it done

Check initial investment requirements by franchising sector Each industry and sub-sector has a widely different set of initial expenses that make up the investment requirements based on their business model.

I recommend: An International Franchise Association (IFA) “Special Report” on initial investments required to purchase a franchise offers an excellent overview of franchise buy-in costs. Check a handy comparison chart of initial purchase fees by franchise category. IFA operates an ongoing series of franchise expos for people considering a franchise (check the site for dates and locations).

Compare and contrast franchising costs Consider purchasing unbiased franchise information products, financial research and analysis to help you make a better decision.

I recommend: FRANdata is a great place to find independent, comparative financial information on different franchise companies for market assessment and competitor analysis. Check their list of available financial products.

Break out the different franchising cost components The U.S. Small Business Administration (SBA) has good advice and information about buying a franchise at its Web site.

I recommend: The SBA’s Consumer Guide to Buying a Franchise includes basic information on initial and ongoing costs.

Line up outside expertise Franchise consulting firms will help you understand and evaluate fees and costs.

I recommend: iFranchise Group is a consulting firm that can help you evaluate your readiness to buy a franchise and sort through franchise options and potential sources of financing.

Find your franchise financing As you consider initial fees, also consider how you will come up with the money.

I recommend: The Franchise Registry program offers expedited financing to purchase a franchise with an SBA-backed loan. See how to finance your franchise (or other business startup) with money in your 401(k) plan or IRA Rollover.

Tips & Tactics

Helpful advice for making the most of this Guide

Future small business owners continue to flock to franchising. With nearly 780,000 individual franchised businesses in America generating 18 million jobs, franchising is a large and growing part of the small business universe.
Cost estimates usually do not include real estate purchases because most franchises do not require you to own commercial property. Included in the estimates, however, are expenses for unit build-out and construction, as well as initial inventory costs.
The franchisor may require that your personal net worth meet a minimum requirement and that you have funds available to tap for working capital other than your initial cash investment.
You may also need to pay for legal services, business and health insurance, employee salaries and benefits, operating licenses, equipment, store fixtures, signs and other items.
Your ongoing costs will likely include a fee or royalty to the franchisor based on a percent of your revenue – usually in the 3 to 7 percent range.
You may also be required to pay into an advertising fund. Some of the money may be used to attract business locally for you, but some may also go to national advertising or to attract new franchise owners.
Although most people still associate the word franchise with fast food restaurants, franchising operates in many industries. It includes everything from advertising, auto repair, hotels and elder care, to personnel staffing, printing, party supplies and many others. In all, about 75 different industries are using franchising as a way to grow.

Franchise Loans

Guide to Franchise Purchase Costs

Action Steps

Tips & Tactics

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