How much does it cost to franchise a retail store?

CEO of Frannexus, award-winning franchise consultant and author of "Profits are Better Than Wages".

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Whether owning your own business has long been your dream or the pandemic has caused you to shift your thinking about your work, many people have begun to consider a change in employment. One way to make that shift is by becoming a franchisee. While it is still a bit too soon for final numbers, indicators have shown that many franchises adapted well to the changes the pandemic caused. The franchising is expected to show growth in , above the 1.5% that it was predicted originally to have. This growth includes a 2.8% increase in the number of people employed and contributing almost $5 billion to GDP, an increase of 4.6%, according to the International Franchise Association.

If buying a franchise is something you are thinking about, one of the critical considerations is the cost. Starting your own business is a serious investment, no matter if you go it alone or opt for the support and guidance of an existing franchise. What are the average costs associated with franchise ownership? What fees will you need to be aware of when you buy a franchise?

Breaking Down The Franchise Fees

How does that dollar figure for your chosen franchise break down? Included in that amount are several fees that you will pay once at the beginning like professional fees to a lawyer to review your franchise contract and ongoing costs like royalty fees that will regularly be paid out to the franchisor. Here is a list of the potential fees associated with an investment in a franchise.

&#; Professional Fees: In addition to having an attorney review the franchise contract, you may also need an accountant to help you go through all of the numbers before you make any investment.

&#; Startup Costs: There are a variety of expenses associated with getting your new franchise going. These can include franchise fees, furniture, fixtures, decor packages, marketing costs, POS software, construction and architectural costs, promotional campaigns and more. Other potential costs include inventory, equipment, insurance, employee training, business licenses, rent, landscaping, signage, etc.

&#; Franchise Fee: This amount can vary, depending on the franchise, but the average amount is typically $20,000 or $50,000, according to the Small Business Administration. This is paid when you first purchase your franchise.

&#; Royalty Fee: These fees are typically paid monthly to the franchisor and are based on a percentage of your franchise revenues. Typically they can run from 4% up to as much as 12% or more, depending on the type of franchise you own. The royalty fee is where franchisors make their money from their franchisees. You will pay this fee as long as you have the franchise.

&#; Operating Capital: Also referred to as working capital, operating capital is the amount you need to have readily available to cover all the daily operations costs of your franchise. Most franchisors will advise you to have at least six months of operating capital on hand before starting your franchise. This gives you a chance to build your business. It can take months before your franchise is profitable enough to cover these costs from the revenue being generated.

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All of these expenses together add up to the total financial investment your franchise will require.

Time Costs For Your Franchise

It can be easy to focus on the dollar figure involved with owning and operating a franchise, but your time is valuable as well. That&#;s why it&#;s important to consider how much of you &#; your energy, your time, your focus &#; will need to be invested to pursue your dream of owning your own business.

First, consider the type of franchise you are pursuing. An owner/operator franchise means you are the business. This is an ideal choice for someone who simply wants to go out and service their customers. With an owner/operator model, you can expect to make a serious time investment because you are the one doing all the work. 

Another option is the executive model. This is franchise ownership as an investment strategy. They don&#;t want to leave their current position. They simply want to take on a franchise as a means of diversifying their portfolio. But this model does require some time commitment, either after business hours or on the weekends.

The executive model doesn&#;t mean that it won&#;t require any of your time or energy. There&#;s a common misperception that some people have that they can step away and the franchise will run itself. There is no franchise that runs itself, you will have to be involved. This involvement may include managing it yourself or managing your manager.

The final model is a blend of the two. In the beginning, your involvement in the franchise will be closer to the owner/operator model. You will be on the ground, running things on a daily basis. However, over time, as the business becomes established you will be able to take a step back and modify your schedule. 

For many, if not all franchisee owners, the final model is the goal. You probably envisioned a business that would allow you to eventually step away, travel, relax or whatever. You were not buying yourself a job that required your attention for five days a week, eight hours a day.

Whichever model you opt for, the end result should be a business where you love what you are doing. No doubt, owning your own business is hard work, but you can determine the amount of work to a large degree, depending on what you want from your franchise. Be clear-eyed about the level of involvement that is required and that you want to give before you start, and you will find that you can achieve a much higher rate of satisfaction in your new endeavor.

There are many ways to afford to realize your dream of owning and operating your own business. If you have been thinking a franchise might be in your future, there&#;s no time like the present to learn more. Start the conversation to see what opportunities are available.

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The estimated cost to franchise your business ranges from $18,500 to $84,500. Below we provide a detailed break down of the costs involved in franchising a business.

Costs to Franchise Your Business

The cost to franchise your business, generally, will range from $18,500 to $84,500. Actual costs that you incur will depend on the franchise team that you are working with, the industry that you are in, and the level of support that you need.

Below is breakdown of the estimated costs at each stage of the franchise development process including, FDD development, franchise operations manual development, formation of your new franchise company, preparation of financial statements, and franchise registration.

• FDD Legal Fee Development - Estimated Cost $15,000 to $45,000.
  Your FDD is a legal document that will serve as the entire legal underpinnings for your new franchise system and includes all of the legal agreements and documents, including your franchise agreement, between you and your franchisees. As a legal document your FDD must be prepared by an experienced franchise lawyer and during the development process, your legal team should also be making recommendations and giving advice about development structures (such as if you will be selling individual unit franchise opportunities, multi-unit development agreements, or both) and ensuring, overall, that your franchise offering is competitively positioned within the franchise marketplace, including the development of Item 19 financial performance representations and other key development factors. Legal development should also include trademark filings, and establishing the corporate entities for your franchise company.
• Operations Manual Development - Estimated Cost $0 to $30,000.
  Your Operations Manual is the confidential manual that you will provide franchisees to guide and instruct them on developing and operating the franchised business. Although the operations manual is not disclosed as a part of the FDD (i.e., since its a confidential document you only give it to franchisees after they sign a franchise agreement) your FDD will include its table of contents and should be completed during the franchise development process. Many times start-up franchisors prepare their own operations manual if they have well developed systems with the idea that the manual will be supplemented and improved over time, and other times start-up franchisors hire development professionals who will develop the operations manual for them. If you are working with an outside professional the cost estimates vary depending on the level of service ranging from assistance for a do it your self operations manual to complete on-site visits and development.
• Financial Statement Preparation - Estimated Cost $2,500 to $5,000.
  As a part of the franchise development process you will (or should) be establishing a new corporate entity, i.e., XYZ Franchising, LLC to serve as the franchisor. It is this new legal entity that will be issuing the FDD and selling franchises and under the franchise rules for many franchise registration states, your FDD will be required to include audited financial statements. Even though your corporate entity may be brand new and have little to no activity, you'll still need audited financial statements which means you will have to pay a licensed CPA to audit and certify the financial statements included in your FDD.
• Filing and Registration Fees - Estimated Cost $1,000 to $4,500.
  As you franchise your business you will incur filing fees that are most typically comprised of (a) incorporation fee (typically around $300, depending on the state) paid to the state that you elect to establish your new franchising corporate entity in; (b) USPTO filing fees (typically around $250 per trademark, per class) for the registration of your primary trademarks - assuming that your marks are not already registered; and (c) FDD registration fees (typically $250 to $750 per state, depending on the state) paid to the franchise registration states when registering your FDD within the state. Most start-up franchisors only initially register their FDD in 2 to 4 franchise registration states and, naturally, this estimate will depend on the number of trademark registrations and FDD filings.

To learn more about how to franchise your business, and the franchise sales marketing channels visit our Ultimate Guide to Franchising Your Business.

Costs for First Year of Franchise Sales

Although not technically a cost to franchise your business, every new franchisor should be considering a budget for franchise sales. Franchising is scalable and building up franchise sales is a process that occurs over years. To start, consider a franchise sales budget within your first year that is focused on building the foundation for your franchise sales efforts. Budgeted expenses should include building a sales website, developing website copy, PR, and presentations that tell the story of your brand and what makes you different. We also recommend building broker relationships and joining broker organizations. The estimated year 1 costs for a reasonable franchise sales strategy should range from $22,500 to $75,500. Of course these estimates will vary depending on how many franchises you plan to sell.

Assuming that you are in a favorable industry that is not oversaturated and assuming that you have a realistic franchise sales goal of 5 new franchise sales (i.e., not sales to your existing organic contacts), you should consider the following aggregate costs over the initial 12 months:

• Franchise Sales Website - Estimated Cost $2,500 to $15,000.
  At the most basic level you will need to develop a franchise sales webpage and, possibly, a franchise sales website. Just adding a standard webpage with a contact form is not enough and will cost you deals. You'll need to invest in a webpage and, eventually, a website that educates and informs prospective franchisees about your franchise, why you'r different and how you franchise can improve their lives.
• Franchise Brand Positioning - Estimated Cost $0 to $2,500.
  As you check out franchise sales websites you may find that they all sound the same - "be in business for yourself, not by yourself" and "we provide training..." - so it's important to spend some time now to evaluate what your offering and get down into writing and, eventually, web copy, the unique selling points of your franchise offering and why your different. You could do this yourself (many times you'll know better than anyone else) or hire an outside team.
• Franchise Sales Presentations - Estimated Cost $0 to $3,000.
  Consistent with the development of your website and franchise brand positioning, you'll need to develop sales materials and presentations that tell the transformation story of your brand and educate your prospective franchisees. You can do this yourself or with an outside team.
• Public Relations and Brand Validation - Estimated Cost $15,000 to $25,000.
  As a start-up franchisor since you wont have a track record of successful franchisees, you'll need to build up third-party validation and there's no better way than through a franchise PR agency that gets your brand talked about and third-party stories and articles.
• Advertising - Estimated Cost $0 to $20,000.
  Paid advertising takes many forms including Google pay-per-click ads and social media sponsored posts and ads.
  
• Joining Franchise Broker Organizations and Attending Conferences - Estimated Cost $5,000 to $10,000.
  Along the way you should plan on attending an IFA franchise conference to gain more industry insights into franchising and also join a lower cost broker organization to start networking with brokers.

Be Strategic!

When it comes to franchising your business remember that you are entering a new industry and franchise success should be viewed from a mindset of implementing a 1, 2, 3, 4 and even 5 year plan. Who you align with and trust to franchise your business will be critical. Work with a legal team that is dedicated to franchising and who can provide you with additional resources, insights, and relationships that will help you grow.

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