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Franchisee Start-Up Costs

Franchisee Start-Up Costs
franchisee start-up

Franchisee start-up costs can vary greatly. Costs can be as low as a few thousand dollars and as high as several million. Below we break down all the expenses you need to think of when opening your franchise.

A Range of Costs

As stated previous, start-up costs vary. From least expensive to most expensive, we glance at different types of franchises and what they typically cost.

Home-Based/Mobile Franchises

Initial Cost: $10,000 or less

Home-based businesses are the least expensive. These businesses typically don’t require the cost of a location or additional staff. The franchisee is responsible for initial fees, royalties, and supplies, but typically not much more than that.

Auto Repair Shops

Initial Cost: $200,000-$300,000

You’ll need a place to work, equipment, and staff. It may still cost less than many restaurants, though, which sometimes require extensive money for decoration and atmosphere.

Fast-Food Restaurants

Initial Cost: $250,000-$1 million

Depending on how established the brand is, these vary. Well-known brands will generally be more expensive to start up. Some units will have higher rent/real estate because of their location. Other factors may be the décor. Some stores may keep it simple, others may require elaborate design.

Full-Service Restaurants

Initial Cost: $750,000-$3 million

Even more so than a fast food restaurant, it’s crucial that customers feel comfortable. These restaurants are more hospitable and generally require a larger space. Food and equipment is also usually more expensive in these types of businesses.

Hotels

Initial Cost: $5 million or greater

Opening a hotel location is not cheap. It will require construction or significant renovation. These locations are large and often require the building of amenities (pools or work out rooms, for example). If the hotel is a resort, this further amps up the cost, requiring spas, restaurants or more. The nicer the hotel, the more the cost will sky-rocket. Possibilities are endless.

Initial and On-Going Fees

These fees are generally unavoidable. Sometimes franchisors will offer certain incentives, discounts, or deferred payments, but for the most part, these costs are set in stone.

Franchise Fee

Cost: Typically $20,000-$30,000. Established or high-end brands can cost $100,000 or more.

This is the initial price you pay for the rights to use the company brand, operating system, and support. It’s considered a one-time fee, but certain franchises will require another fee to renew. This may be 5-10 years later, depending on your contract.

Royalties

Cost: Usually 4-8% of gross revenue.

The royalty fees are on-going. This will also be outlined before you sign. Whatever revenue your franchise generates, the company receives a specified percentage.

Initial Expenses

Real Estate

Cost: Varies greatly

Your business has two options when it comes to your business location: lease or own. Real estate will be a significant investment for any entrepreneur. To build a large property like a hotel, costs will be really high. Population is a factor as well. Urban areas will be more expensive to purchase than somewhere rural.

Rent

Cost: Varies.

Once again, there are plenty of factors that affect this cost. The same factors apply to rent as they do real estate, but it is a less costly investment. This minimizes some of your risk, but real estate can pay off long-term. Both the franchisee and franchisor will have to weigh the pros and cons to make the best decision. Many units will rent based on the sq foot of a unit (Example: $7 per square foot). Also keep in mind that this is an on-going cost as well. Rent will have to be paid monthly, or any other specified frequency written in the lease.

Professional Fees

Cost: Generally $150-$500 per professional hour.

This includes attorneys to review contacts and accountants to help you understand the numbers. The hourly fees will vary, and other fees may be attached, depending on the firm and professional. You will definitely need these services at the start of your business, but you will require their services on an on-going basis as well. Occasionally you’ll need the eyes of a specialist to take care of certain business tasks or resolve an issue.

Store Renovation/Construction

Cost: Varies.

This cost is another that can vary greatly. If there’s a building project, this will likely take millions. If renovating, it can be multiple thousands of dollars or millions, depending on equipment and décor. Preparing a leased store to be a Subway will require less renovation than a hotel converting from one brand to another.

Landscaping

Cost: Renters may pay nothing. Real estate owners will typically pay thousands.

If renting, renters may pay nothing at all. Landscaping a storefront will be on the low-end of landscaping. If on a larger lot, these costs will go up. Major properties, like a hotel or resort, will require significantly more landscaping work.

Signage

Cost: Storefront signs usually cost a few hundred or thousand dollars, depending on size, type, and material. Outdoor, stand-alone signs will usually cost $5,000-$15,000.

Signage can mean all kinds of things. It could be a logo painted on a window, a neon sign on the storefront, or a stand-alone at the side of the road. Size, type, and complexity will cause costs to vary.

Business Licenses

Cost: Varies.

License requirements and costs depend on state and type of business. If building or renovating, you’ll need certain construction permits. You may be required to pay zoning fees or get a license to conduct business. Hair salons will require hair styling licenses. Restaurants and bars will require liquor licenses. This cost really depends on where you are and what you are doing.

Inventory

Cost: Fast food inventory usually costs $3,000-$40,000.

Many food service businesses will generally cost the owner a few thousand or a few tens of thousands of dollars. This will help the franchisee secure any inventory and supplies he/she needs. Inventory can also be considered an on-going expense because you’ll need to replenish as the business operates.

Employee Training

Cost: Few hundred or several thousand dollars.

Depending on the type of business you own, training costs will vary. A small staff with simple tasks and low-cost training materials will cost significantly less than a large staff with many corporate and legal rules. Training is another cost that will be on-going. It costs you both the direct capital spent on training materials and the indirect costs of a learning employee.

Grand opening/Initial Promotion

Cost: Generally $10,000-$20,000.

For many fast food businesses, grand opening promotion will cost the franchisee $10-$20 thousand. This covers special coupons, signage, and promotion for the new location. However, this figure can grow significantly if complex advertising campaigns are launched.

Insurance

Cost: $2,000-$10,000

The franchisor will often offer a lump sum insurance fee to be paid for the year. For the standard fast food place, it will likely be a few thousand dollars. Certain types of businesses may see substantially higher insurance rates.

On-Going Expenses

Loan Payments

Cost: Varies.

If any loans were taken out, payments will need to be made. This will vary based on the size, interest rate, and repayment period of the loan.

Salaries

Cost: Varies.

Once again, this is an extremely variable cost. For many businesses, employees may be paid hourly. In food service, these employees will likely be paid closer to minimum wage. Professionals will require a higher hourly fee or a fixed salary. Some franchises will only require a few workers, while others require extensive staff. All of these factors determine the salary cost.

Uniforms

Cost: Few hundred or thousand dollars.

Uniform costs vary with the size of the staff and the uniform quality/requirements. For some businesses, this may just be a tee shirt. For others, it may include slacks, polo, apron, and hat. The more uniform pieces and the higher the quality, the more costly.

Utilities

Cost: Varies.

You may be sick of seeing variable costs, but that’s the reality of many of these expenses. Renters may have no utilities if their rent is all-inclusive. Potential utilities renters and owners may have to pay: water, gas, electric, trash. Large properties may pay massive electric and water bills, while a small store will be substantially lower.

Maintenance

Cost: Varies.

Many things may require maintenance in your business: equipment, landscape, décor. You may also choose to hire a cleaning service, rather than have employees take on the tasks. Depending on the size of the unit and needs of the equipment, the costs have a wide range.

Planning your Investment

The above list makes the task of franchising seem daunting. Keep in mind that not all of these costs are associated with all franchises and that costs for some are significantly lower than others. Most franchisors will clearly define your franchisee costs. Use all the information they give you as a resource to make the best financial decisions for your unit.

Franchise Science CEO, and Franchise Growth Institute Executive Director Harry Miller has made a career of successful franchising, including both client and consulting-side perspectives. He also serves as VP Franchise Development for Persona Pizzeria, a fast-growing, fast-casual concept. Prior to founding Franchise Science and Franchise Growth Institute, Harry was Senior VP of Francorp, one of the first international franchise consulting firms, and lead consultant to some of the largest and most successful franchise concepts. Prior to these extraordinary experiences, Harry owned and managed a Radio Shack franchise, and ran multiple offices in Los Angeles for a 400 unit tax resolution company. For several years, he assisted scores of entrepreneurs across the continent in obtaining angel funding and capital investment through due diligence roles relevant to franchising. Harry credits his training in the U.S. Navy, and working on a farm in South Dakota for his discipline and unrelenting work ethic brought to each franchise engagement.

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