Franchise Buying Guide

Franchise Basics

Associated Costs
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

In terms of capital investment, your franchise fee will be determined by the profitability of the business. Most companies have a scale when it comes to franchise fees. They can have varying ranges, anywhere from $2,000 to $100,000+, depending on the size of the system. In addition to this front-end franchise fee--the one-time charge that a franchisor assesses you for the privilege of using the business concept, attending their training program, and learning the entire business-there will also be an ongoing royalty fee, typically ranging from 2 to 10 percent, or a monthly figure.

Some of the other costs associated with a franchise include:

Facility/Location
In some cases, you may also have to buy land or a building, or you may have to rent a building. If you rent a building, you'll be responsible for not only the monthly lease but for the one-time security deposit as well. In addition, you'll have to pay for leasehold improvements. In some cases, the owner of the building will put these in and factor them into your rental, probably charging you a small additional fee. The franchisor might provide you with an allowance for leasehold improvements that runs in the neighborhood of $10,000 to $35,000 for your average franchise. Most franchisors will tell you what their estimated leasehold improvements will be.

Equipment
Different types of businesses will need various pieces of equipment. There are generally long-term payments available for most equipment purchases. Fortunately, most banks will provide loans for equipment because it also serves as collateral.

Signs
Outside signage can be very expensive for the small-business owner. Most franchisors have developed a sign package that the franchisee is obligated to purchase.

Opening Inventory
This will usually consist of at least a two-week supply, unless you're in a business that requires a much more complicated inventory. Most franchisors will tell you what their opening inventory requirements are.

Working Capital
For rent, you may be required to deposit first and last months' payments as well as a security fee. You'll also have to pay a deposit to the electric, gas and telephone companies (who will want deposits prior to giving you service). You'll need some working capital and money in the cash drawer to make change. You'll need money to pay your employees. You'll need money just to operate until there's a cash flow. If you're buying a franchise that relies on charge accounts, you're going to have to allow yourself some additional capital before the bills are paid by the customers and returned to you.

Advertising Fees
There is usually a fee for advertising on a regional or national basis. Most larger franchisors require their franchisees to pay a certain amount into a national fund used to advance the concept. The upside is the benefits are quite substantial in terms of the visibility you get with the type of advertising that most franchisors do.

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