Opening a successful franchise can end up being an incredibly lucrative investment when done correctly. Of course, there are a lot of initial costs you’ll have to pay when you open a franchise. Keep reading to learn how much you have to invest to open a franchise.
What Does It Mean To Buy A Franchise
Before we get into the costs of opening a franchise, let’s break down what a franchise is exactly. A franchise is a kind of license that the franchisee party gets to let’s them gain the business’s franchisor processes, knowledge, and trademarks. This way the franchisee can sell that franchise’s product or service under that business’s name.
In order for this to obtain this license, the franchisee will have to pay the franchise or an initial start-up for annual licensing fees. In other words, when you buy a franchise, you are essentially buying the benefits of an already established business.
While you are a still creating a business from the ground up, you’re doing it with less risk because you already have the framework of an already established successful business model.
The Difference In Franchises
Keep in mind that franchises come in all different shapes and sizes, and there is no standard size franchise, which will affect the cost. With some franchises, you are buying just advertising, logos, and maybe the leasehold for various types of equipment.
While with other franchises, you will buy the whole package which will include the real estate and equipment. Another perk of buying a franchise over starting a business from the ground up, is you’re also getting the marketing and advertising, instead of having to fund your own.
You can take advantage of the franchisor‘s marketing reach and image, and even benefit from its local advertising.
Franchises Are Part Investment, Part Business Venture
When you buy a franchise, you’re essentially investing in a company and starting a business at the same time. On the investment-side, you are investing money into the business to buy and open a local store. The cost of this can be expensive, and it’s not a passive investment, as you will need to be hands-on to manage the operation.
How Much Does It Cost To Open A Franchise
You might be able to buy into a franchise for just a few thousand dollars. In these cases, you are likely just paying for the organization, name recognition, and limited marketing exposure.
While buying a better-known franchise can cost millions of dollars. In those cases, it’s not uncommon that the franchisor might provide you with some financing. You will still need to come up with a larger percentage of that investment upfront using your own resources.
For example, if the initial investment is 1.5 million, you might need to have $500,000, and the franchisor will finance the other million. Entrepreneur.com broke down the investment cost range for the 500 most popular franchises.
According to this, business like McDonald’s, Sonic Drive-In and Hardees costs roughly between one to two million to franchise. While 7-Eleven can cost between $38,000 to 1.1 million to buy a franchise.
Basically the initial investments from the top ten franchises can be as low as 38 thousand or as high as 2.6 million. The same franchise can also have a wide range in variation from it’s low to high investment. This is because of factors like the cost of real estate in a certain city or neighborhood, as well as the favorability of that location.
How Much Can You Make With Franchise?
Just like it’s challenging to pinpoint the exact amount a franchise will cost you, it’s also hard to ballpark how much your franchise will make. This is because there are hundreds of various franchises you can buy, and each has a different level of profitability based on the location.
Entrepreneur.com also reported that the profit on average for resturant franchises was $82,033. The franchisor will have to also give you a document called a Franchise Disclosure Document (FDD). This will spell out the terms of the franchise agreement, which includes the obligations for both you and the franchisor.
The franchisor might also give you information on the financial performance of your franchise outlet, which should include the financial statements for the past three years. Keep in mind this information will not be available for an upstart operation.
Get Ready To Get Your Hands Dirty
You should also know that well-established franchises will requite you to go through training that is extensive. They might even give you on-site personnel to get the business off the ground. You also need to staff your establishment, which will require positions to be filled.
Some franchises, like restaurants, may require you to be open 24 hours a day, or from 6 AM until midnight. These long hours require a lot of stuff that you not only have to train but manage them on a regular basis.
Until you can hire a full-time manager or management staff, you will have to handle all the scheduling, supervising and purchasing to ensure even workflows. You will also have to be able to give information to the franchisor on a regular basis.
Franchises Are NOT Passive Investments
If you are considering getting a franchise only as an investment, know it’s not like investing in a financial portfolio. It’s also more hands-on than managing an investment property. Especially in the beginning of a franchise, you will have to be involved in every detail of the operation working easily 60 to 80 hours a week.
Even after the launch phase, you will still be working about 40 hours a week. Even if you hire a manager, you will still have to be part of the operation regularly managing your manager. Even the best-run franchises are never completely passive.
Invest In A Franchise Today
Now that you know how much it costs to open a franchise, look into opening a franchise a day. Keep in mind that owning a franchise can cost a lot of money and time, but could end up being profitable down the line. For more resources on opening franchises, check out our blog!