How Much Does A Franchise Cost?
Oct 03, 2023
One of the most popular questions I get as the president of the American Franchise Academy is how much does the franchise really cost? What I always answer is that to understand this number, first, you need to know what is the value of what you are paying.
Think about it! If something has a certain price and what you get in return is not that good, you might be disappointed. But, if something else has the same price and your gain in return is great, your perception may change.
That’s why I say that before exploring the numbers of how much a franchise truly costs, you have to first understand what you get when you invest in a franchise. So, when we go into the prices, you can determine whether this is valuable or not, depending on who you are and your background and experience.
What a franchise offers
When you buy the rights to duplicate a franchise from a franchise owner, you get three things of great value:
1. The product they sell: it can be a physical product, a service process or procedure, or even a group of services that customers are willing to pay for.
But it’s not any product or service. It is one that the franchisor or company founder created, designed, and iterated, with a lot of hard work, to come up with the winning formula that delivers exactly what the consumers want, so much so, that this desire supports the business.
Getting there takes a lot of time, money, and effort! In fact, discovering such a product or service is the biggest challenge in a business.
if you don't have a proven product or service that consumers are willing to pay for, then you can have a business, but won’t have enough revenue to sustain a profitable, healthy business.
- That is what you buy in a franchise: the amount of years and investment someone put into creating this product or service that people will give you enough money to make it into the business.
Along with the product comes all of the procedures, training materials, job descriptions, and operations manuals that will allow you to duplicate that proven brand into your current franchise unit and the future ones you’ll open.
But you need to have the secret formula, which consists of the processes and the step-by-step on how to duplicate that brand exactly the way it worked in the original business.
- That means that, when you buy a franchise, you get the product as well as the tools and materials you need to duplicate that business.
2. The service process in which to sell it. Every brand has a way in which they deliver that proven product.
If it's a food service, for example, surely there is a drive-thru process, a dining process, a counter process, a take-out process, and of course, a delivery process.
They have a reason for being: the franchisor, original owner, or founder created and defined the service procedures that have to be done so the customer experience is a positive one and causes them to come back again and again, to maintain a healthy revenue and a successful business.
- That is something franchise owners also offer: the service procedures to give customers a positive experience.
3. The image of where to sell it. The franchise owner hired an interior or graphic designer, and other suppliers and vendors to develop an attractive image. Finding the right people and creating a successful brand requires time, effort, and a lot of money. And if they did it on their own, it probably took them many years.
And there is also the marketing support, usually regional or national, and the architecture design and the details of site selection.
Along with this, you get the support and enforcement of a franchise network that’ll do everything within its power to protect the brand to have a continued positive experience throughout the units and the image remains healthy and positive.
In order to take care of the business, franchisors make different types of brand audits and supervision visits. By doing that, they're protecting the brand equity and the value of the brand you invested in as a franchisee. And you absolutely want them to do that!
What a franchise costs
These three elements sum up what you get when you invest in a franchise. With this information, you can begin to calculate how worthy is the franchise model versus how much ¡ would you pay if you did it on your own.
Now that you have that perspective, let's dig into the true franchise cost. To begin with, you must be clear on the different types of expenses:
- Initial expenses, which are usually one-time fees.
- Ongoing expenses, that you’ll be paying for as long as you have the rights to exploit the brand. Usually, these are charged as a percentage of sales.
Let’s zoom into each one.
One time expenses
- Franchise Fee: between $10,000 to $30,000 per unit, depending on the brand and the model
This is the right to open a brand unit and it represents how much it costs the franchisor to attract you as a franchisee and what they invested in supporting you in the initial opening of your first unit.
It is not a profit center for them, but a sum to get back what they paid to have you as a franchisee and to support you in your store inauguration.
- Construction costs: between $250,000 to $1.5 million, depending on the brand
Most franchise owners don't build the unit so you have to invest in finding the right location and whatever expenses come from getting that location.
Then, of course, you have to pay for all the leasehold improvements, meaning everything you have to change in that location to meet the brand standards and store prototypes.
This concept also entails buying the equipment, inventory, and furniture to condition and operate the store.
This concept can make the initial investment much lower or higher since the final cost strongly depends on the type of brand and model you’ll operate.
All of this information is included in the franchise disclosure document, a document that franchisors hand to their potential franchisees, and contains what these expenses are in detail.
On-going expenses
- Royalties: anywhere between 4% to 6%
The royalty payment usually represents a percentage of your top-line sales, or the revenue, which is what the brand delivers to you. You have to pay it regardless of profit or not. So even if you are not making money in your franchise, you still have to cover this expense.
It also corresponds to what you're paying in exchange to be able to duplicate the brand. Because at the end of the day, this brand gives you the ability to have revenue.
Profitability, on the other hand, is totally on you. That’s why you need the business acumen and knowledge to manage a small business successfully to ensure that that revenue turns into profit.
- Marketing Fees: a range of 1% to 4%
The franchisor uses this money to promote brand awareness and do marketing activities regionally or nationally, depending on the brand size.
Those are also calculated as a percentage of sales because, again, the goal of the campaigns is to increase your revenue.
Clearly, this means that how much profit you make will completely depend on your knowledge and business management!
Note: not every franchisor charges this concept.
Now that you know how much a franchise may cost, compare brand by brand, industry by industry, and analyze each option individually to identify your ideal business.
If you want to become a franchisee or you are not making enough money from your franchise, the American Franchise Academy is here for you!
Your franchisor is responsible for giving you a great, proven brand, and we can give you the education, the business acumen, the processes, systems, and procedures that would allow you to turn that revenue into profitability.
Learn more by exploring our programs and discover how they will help you be successful as a franchisee.
Get more tips on what you can do to thrive and operate a successful franchise by following us on all social platforms, including our YouTube channel and podcast.
Reflections:
- Do you truly understand how the franchise model works and what you need to do to maximize your profits?
- Have you read and analyzed the franchise disclosure document in detail?
- Are you financially able to cover all the concepts within the franchise investment?
- Do you have the business acumen and skills to turn the revenue into profit?
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