You’ve always had the dream of owning your own business. You have the experience, the drive and motivation, but what about the financial backing that’s necessary to fully pursue your goal? Owning your own franchise, (typically much less riskier than starting a non-franchised business), can satisfy your entrepreneurial spirit, while pragmatically investing your hard earned savings/retirement. So, how much does starting a franchise cost? How much money should you have in working capital to get you to a cash flow positive position? Obviously that depends on many factors, including but not limited to the franchise business model, your personal work ethic, the market and competition, demand for services, and the initial and ongoing support of the franchisor who’s dedicated to building your business with you as a franchise owner.
Today’s Average Cost of Owning a Franchise
Your franchise fee can vary in range and is normally determined by the profitability of the business. Usually the fee can cost anywhere from $7,500 to $75,000 or even higher depending on the size and prosperity of the entire franchise system. Along with your franchise fee, as a franchisee you will also be responsible for royalty fees, which typically range from 2% to 10%.
The initial start-up fees aren’t the only costs in owning a franchise. As an owner, you must also keep in mind maintenance and management costs. Here are a few additional costs to consider if you’re thinking about owning and operating your own franchise:
- Equipment– depending on the franchise system and its industry, you may be required to purchase certain types of equipment to operate advantageously. If equipment is necessary, you can either rent or secure a loan to purchase the equipment.
- Opening Inventory– opening inventory is a large supply of product or materials needed to operate your franchise. Usually this amount is anywhere from a two-week to 30-day supply based on your monthly sales.
- Location and Facility costs– depending on the franchise system, you may or may not need to lease or purchase office space for your own franchise. Usually you can rent a space at a monthly rate and sometimes the franchisor will provide an allotted amount for you to put towards any maintenance or renovations needed.
- Signage– Marketing is crucial and having uniform branded materials throughout all franchisee markets is a must! Since branded marketing materials are necessary for all owners, franchisors will normally supply their franchisees with a kit or start-up packet that covers basic marketing materials needed for opening and continued operation. However, should the franchisee need or desire extra materials, the franchisor may provide additional marketing supplies, or as the franchisee, you may have to purchase and supply the extras for yourself.
- Working Capital– This is the amount of money estimated to get your franchise to a break-even point and beyond. Things like salaries, rent, marketing, utilities, etc. must be paid beginning in your first month of business regardless of your revenues generated for the same month.
The additional costs listed above are a few basic costs that should be considered as you consider your financing options to open your own franchise. In some franchise systems there may be fewer additional costs or even more depending on the system and industry.
The first step to take when considering your finance options is to see what you’re approved for, how well established your credit is and how much financing can you receive through the franchisor. Some franchisors will finance a portion of the capital needed through their own finance companies that they use. There are several loan structures to consider for financing your franchise:
- Loans with no principal payment, a simple interest rate with a balloon payment is very common. A balloon payment would be a large sum payment that wouldn’t be due until years after starting your franchise.
- There are also loans available that require no payment until after the first year of starting your franchise.
- Franchisors are able to help franchisees on a financial level by helping franchisees develop their business plan and guiding them through their lending options, providing valuable information on lending institutions.
- Never invest more than 75% of your cash reserves. You need to always make sure you have cash in reserve!
- Always be sure to have a “pillow” of working capital to manage your franchise in case of unexpected expenses
- Find lenders who have a deep knowledge of small businesses and franchising.
For more information on financing your own franchise or to find an available franchise visit franchise.org. If you’re interested in becoming a FirstLight Home Care franchise owner, please visit our franchising website and view all of our available franchising opportunities! To speak with a FirstLight Home Care member right away, please call us at 1.866.985.5348 or download our Franchise Information Kit.