The Right Franchise Business InvestmentNov 01, 2022
Acquiring a franchise requires a significant investment. And usually, the higher the investment, the higher the Return on Investment (ROI).
- But are franchisees investing the right amount and in the correct places, to ensure their long-term success?
That is what we’ll dig into in this blog post. First, we’ll go over what is a normal franchise investment and then, how we at The American Franchise Academy think this process should be, to have a great impact on your business.
What a traditional franchise investment looks like
After you have selected what you believe is the best franchise, you’ll have two types of expenses: one-time investments (or the startup cost of the franchise) and ongoing ones (which you'll constantly have).
- Franchise fee
This is the initial payment for the right to open the unit. Multi-unit franchisees will have to pay it every time they open a new unit. It could be anywhere between $20,000 to $50,000 per unit.
- Brand build-out
Depending on the model, industry, or franchise, you’ll have an initial expense on the build-out.
The average expense is between $250,000 (usually for service-based businesses) and $1.5 million (for mature, well-known brands with self-standing buildings, drive-thrus, lobby, and take-out). That does not include the investment in the land itself.
Even though this is the initial investment, consider you’ll have an operational expense to maintain that physical building.
- Equipment and small wares
This has to do with everything you need to operate that brand, whether it's furniture, tables, counters, display shelves, ovens, or fryers. Also, small wares or daily tools that have to be replaced eventually. The amount ranges from $10,000 to $100,000.
- Royalty fee
They are between 4% to 7% of your sales, paid every week or every month. They represent the right to duplicate that brand every week, month, and year. That means that for as long as you have that brand, you’ll pay those percentages of your sales.
Let's say the franchise brand charges 5% of your sales and your revenue is $500,000 a year. Every year, you’ll pay the franchisor $25,000 to keep using their brand, systems, processes, and product as a way to get revenue.
- Marketing fee
This fee is not revenue for the franchisor; it is what you pay, every week or month, to market the business. The average fee is between 1% to 4% of sales and it usually involves national promotions, brand awareness, videos and commercials, and publicity.
Some of that money also goes towards innovation to help you increase your sales year over year.
Going back to the example, and setting this fee at 2%, that would mean that you'll pay the franchisor $10,000 a year for those marketing efforts that hopefully increase your sales.
An important specification: these fees are calculated as a percentage of sales, not profits. So, considering both fees, you would have to pay 7% of your sales, or $35,000 a year, whether you make a profit or not.
Beware: if you have a great brand that brings you $500,000 in revenue, but you do not have the skills and abilities to make a profit, manage your labor and product, control your expenses, and hire the right people, you’ll make zero profit. But you still will have to pay those fees to the franchisor.
Is buying a franchise a good idea?
That being said, investing in a franchise is a good move? Absolutely! Especially for those who are not creative, talented, or skillful, or have the money to hire experts to help them build a proven brand.
I recently researched that, sadly, 65% of independent businesses fail in the first three years of existence. But, unlike solopreneurs, franchisees have a proven brand behind them to support them.
But, what is a proven brand? It is the one that people recognize and trust. They know what the business sells and are willing to pay for it. The best part: they come to buy the moment you open your doors, whether you do marketing or not. That means the business will automatically have revenue and winning sales!
But there are no guarantees on profitability. If this proven brand is managed well enough, it may give you profit. The other part of the formula is up to you, and you need to make it happen.
What a franchise investment should be
Here's how I think you should invest in a franchise. Aside from the starter and ongoing expenses listed above, I recommend you make these additional investments, especially if you have never managed a business. Trust me: they will help you avoid the franchise struggle and prevent you from closing your business.
- Leadership and business management education
I don’t mean a four-year college degree, but a place that can give you the knowledge you need to run a small business franchise.
Unlike courses at a college that cost around $80,000 to $100,000, these programs are normally between $10,000 to $40,000.
Make sure the content will help you acquire the talents and skills to ensure profit because you already have a proven brand that will bring you revenue. What you need is the knowledge, abilities, tools, and resources to have profitability.
- Coaching, mentorship, or business network
You need some sort of shelter where you can be with peers who are experiencing the same things you are. Where you can learn from them (and them from you) to improve your leadership, systems, and processes, to overcome the micro and macro challenges that happen in your industry.
This ongoing investment could cost between $3,000 to $12,000 a year and it will help you continue to succeed in the long term and remain profitable.
This is how I would suggest you invest in your business. We tend to invest hundreds of thousands, millions sometimes, into proven brands which is fantastic because they almost guarantee revenue. But how much are we investing in guaranteeing profit? That's a great question, especially if you do not have business skills.
The American Franchise Academy is one of those places where you can get your leadership and business management knowledge, as well as a community of professionals that can help you thrive.
We have a program called The Command Program, which is an 11-month workshop where we teach you the knowledge, tools, resources, and support to be a successful, profitable franchisee.
To know more about this program, join us in our upcoming information session, free of charge. Register at MultiUnitSuccess.com to discover what is included, how we deliver it, how much it costs, and how we can help you.
Reach out to us if you have any questions on this matter! Subscribe to our YouTube channel and follow us on Facebook, Instagram, and LinkedIn. Also, listen to our podcast Franchise Success Formulas on Spotify and Google Podcasts.
- Are you receiving everything you expected from the franchise you invested in?
- How can you boost your sales?
- Are you generating not only revenue but profit so you can fulfill your business goals and personal dreams?
- How much are you investing in improving your leadership skills?
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