Today’s economy leads business owners to be very cautious about their outgoings, and when it comes to expansion there is no exception. For years, franchising has allowed many a small business to grow into a household name the world over, Dunkin’ Donuts, McDonald’s, and SUBWAY to name a few. Making it an attractive choice for many ambitious entrepreneurs.
One great advantage to franchising as a route to growing a business is that franchisees cover much of the cost of setting up the new location and even pay a fee to do so-they literally pay you to help expand your business. This significantly lowers costs for the founder of the company making it a highly financially rewarding method.
However, although low cost, it is by no means ‘no cost’. A large proportion of franchise failures stems from overzealous expansion. Business owners frequently underestimate their financial limitations. The illusion that new units can be opened as quickly as they can be sold is risky and leads to trouble if the capital to support this level of growth is lacking.
As such it is important to consider your new franchise as a new business. Not only in terms of providing the right training and support to help a new business flourish, but also by budgeting accordingly.
Although franchising allows you to grow very quickly it still requires you to spend money to make money. How much is enough? That depends a lot on the rate at which you’re looking to expand, however, we’ve put together a list of the various estimated costs involved in developing a franchise.
Estimated range: $3,500-$7,500
Before taking the plunge into the unknown, getting in touch with a franchise consulting company for a feasibility study is highly recommended, particularly if you are looking to expand rapidly. Undergoing this in-depth analysis that will alert you to the amount of competition your brand will face. As well as the likelihood of success for your business as a franchise. The results of this study will inform you of how practical your proposed plan is, and may foresee issues you are likely to encounter during your endeavour, shaping the project going forward.
Estimated range: $38,250 to $91,000
In order to comply with Federal Regulations every company going into franchise needs a Franchise Disclosure Document as well as a Franchise License Agreement, the costs for which can range from $20,000 to somewhere around $35,000.
There are currently 14 registration states with franchise registration fees ranging from $250 to $750 plus additional legal fees leaving you potentially $15,000 to $25,000 out of pocket.
A Federally Registered Trademark will set you back $1,750 to $7,500.
Your Franchise Disclosure Document requires that you submit basic financial information about your company. $1,500-$10,000.
Furthermore, if you enlist somebody as a new legal entity to be the franchisor that can add an extra $13,500 to the total.
Training and materials
Estimated range: $25,000-$70,000
In order for your new franchise locations to be successful, you will need to support your new franchisees with training on how to open and run their business as per your business model. They will need enough training to comfortably be able to run a successful copy of your business, the preparation of these materials can range anywhere from $15,000 to $50,000.
Additionally, you will also need to provide training for Franchise sales. Staff will need to be trained as to how to complete sales within government guidelines, this will be another $10,000 to $20,000.
Estimated range: $22,500-$135,000
The quicker you want to expand the more this will cost. In order to drum up interest, it will be important to advertise your company as available for franchising. Initially, you may need to make a Franchise Marketing Plan which could cost $7,500 to $15,000.
There will be marketing materials required in order to entice potential buyers to the opportunities on offer. Including brochures to introduce your company to prospective franchisees, these play a key role in demonstrating the credibility of a franchise, the design and production of which can be costly. In this digital age a credible website and if you’re not a website designer it would be wise to invest in one to make sure you’re setting yourself up for success. Although websites are increasingly more affordable you still need to budget for this.
In addition to the marketing materials designed to sell franchise units a further sum for advertising for franchise buyers should be budgeted for ranging $15,000-$120,000 depending on how ambitious targets for first-year sales are.
Estimated range: $0-$200,000
Although initially, a modest franchisor may be able to manage without employing any extra staff. If you plan on expanding more aggressively (over 10 unit sales in a year) it may be worthwhile to look at taking on a Franchise Development Manager, trainer and fresh support staff in order to make the new workload more manageable. If this is the case, you can expect to budget up to $200,000 for additional staff.
Estimated total range: $89,250-$503,500
With businesses satisfied with modest growth falling at the lower end of the spectrum, while those set on a much more rapid rate of expansion will cost much more.
Although these figures may seem intimidating, franchising can be immensely lucrative if done in the right way. Scrimping on expenses at the start may well cost more in the long run, making the payments named in this article well worth the investment. Bare in mind that launching as a franchise still comes under the category of low-cost methods when talking about expanding a business. It also comes with potentially endless benefits and could prove to be the start of your global empire.
Not every business is the same and all expenditures mentioned here can be discussed with a franchise consultant who will be able to advise the right course of action for you based on your individual case.