The Costs of Establishing a Franchise
Before you get going with any business, you need to know upfront what it takes to get started. Costs with many establishments are straight-forward, but franchises can be a bit confusing. A franchise is when someone pays a company to use their name and logo and operate under it as part of their business. The costs can be complicated, so you need to take time to understand them before you get started.
Initially, you’re going to have to pay fees to the franchisor simply to use their name and logo. This is paid when your agreement is signed. In your agreement, it will include not only the dollar amount you have to pay, but also how long you will be given the right to use the copyrighted material. It may or may not include details for renewal, but this is generally something you will find out in advance.
In addition to paying the franchisor for the right to use their name, you will also likely have to pay for extensive training. This will include all company policies and ideals, but also how to set up your business, how to run it, how to treat employees and customers, and anything else the franchisor feels is important for running your business in a manner that sheds a positive light on their company name.
Once you know how the franchisor wants their company run, you’ll need to buy the tools they feel you need to accomplish this. This will not only include items you’ll have to reorder like hamburger patties or the company brand car parts, but may also include permanent fixtures in your store like the shelves you put your products on or the whiteboard you use to post prices.
You’re also going to need a place to put your business. Many franchisors have already set up a location for your business by the time you’re trained and ready to go. Even though the building is prepped on the outside, you still have to pay either a flat rent fee, or a larger portion of your profits. And many franchises that don’t have specific building requirements will make you find your own location.
Many franchisors also require you to pay advertisement fees. This is the money they pool together and use to market all their establishments. You will likely have to pay costs up front, and then continue to pay on a periodic basis.
Growing up, my mom always told me that if a business went under after three months, it was because the business wasn’t doing well, but if it went under within the first three months, it was because they didn’t have enough capital to start out their business.
This has always seemed like a good rule to follow. When opening a franchise, or any other business, your starting capital should not only include your basic start-up costs, but also enough money to run the business for the first few months, until you can establish a customer base and start making money. If you can’t buy supplies or pay your employees, your business isn’t going to get anywhere. And while three months is a good estimate, the more you can have stored away for operating costs, the better.