Franchises and independent small businesses for the most part share many of the costs associated with starting a business. However, franchises do have some special costs associated with them, which are profiled here.
Franchise costs are commonly divided into two categories: initial (or upfront) costs and ongoing (or continuing) costs. Initial costs are the expenses that the franchisee will pay in order to begin operation of the franchised business, while ongoing costs are the expenses involved in maintaining operation. Franchisors have various ways of presenting the costs associated with beginning and maintaining one of their franchised businesses so please consult the literature of a specific company for a complete breakdown of costs associated with investing in that franchise.
Initial Investment Costs
The initial costs of a franchise can range from a few thousand pounds into the millions of pounds depending on the industry, building requirements, equipment needed, and several other factors. The most notable fee that varies from franchise businesses to non-franchise businesses is the franchise fee. This fee stems from the heart of the franchise model, and helps the franchisor ensure that their business system will be executed as consistently as possible across all of their units.
Some common initial costs in beginning a franchise business across all industries are
- Franchise Fee
- Training Expenses
- Leasehold Improvements or Real Estate Costs
- Equipment
- Professional Fees
- Advertising/Marketing
Working Capital
The range of investment between different industries can be large, as can the variation within a single industry.
Ongoing Costs
After the franchise business is up and running, there are a number of expenses required for the successful maintenance of the business as well as for being a part of the franchise system. Like the franchise fee, the royalty fee is a main differentiator between a franchise and a non-franchise business. Typically royalty fees are assessed as a consistent percentage or flat fee due weekly or monthly, and are predominately assessed for the franchisee to continue reaping the benefits that come with being a part of the franchisor’s business system.
Common ongoing franchise fees include the following among others
- Royalty Payment
- Advertising/Marketing Fund
- Technology Fees
- Insurance
In addition to the regular fees, there are fees associated with the franchise system that aren’t assessed or collected regularly including
- Ongoing Training
- Transaction Fees
- Interest
- Audit
- Indemnification
- Renewal Fee
Due to the depth and variety of franchise businesses, the given fees illustrated here are only the most common and not a complete listing. Additional fees collected by franchisors along with ones that are specific to certain industries such as reservation fees for hotel franchises can be found within the literature franchisors are required to make available to prospective franchisees. Please note that there are also ongoing costs that are no less important to the continued operation of the franchise like employee wages.
As you have read, most of the costs of beginning a franchise are similar to beginning a non-franchise business with a few notable differences. Though no business venture can be a guaranteed success, the features given in exchange for the additional costs that come along with investing in a franchise can help bolster an entrepreneur’s chances of creating a successful business.