How Much Does Buying a Franchise Cost?
August 18, 2023The answer to how much purchasing a franchise costs is, of course, dependent on a variety of factors. The problem is that many prospective franchisees think of the initial franchise fee and buildout costs as the sole costs to open and begin operating a franchise. Unfortunately, that’s not the case.
Is It Cheaper to Buy a Franchise or Start Your Own Business?
It varies, but owning a franchise may not be as reasonably priced as you might assume. The initial franchise fee (which can range from $10,000 (or less) to $100,000 (or more) and buildout costs usually constitute a significant portion of what it will cost to purchase and open a franchise. They are not, however, the only costs associated with opening.
How profitable is owning a franchise? It can take a while to recoup your initial investment before making a profit — if you make a profit. Franchisors are required to include estimated opening expenses and franchisees frequently rely on these estimates to their detriment as representative of all startup costs. The opening expenses are going to vary by location and even on the timing of when the expenses are incurred. A franchisor’s disclosed estimated expenses to open from the prior year may not be reasonable for every franchisee.
It is important to consider the opening expenses on your own and talk to contractors, other franchisees, and others with experience in the industry on what the actual cost will likely be. This is not to say that franchisors intentionally lie (although this has happened), but the variability of buildout costs is such that estimating them for a franchise system with units all over the country is going to result in such uncertainty that you should conduct your own due diligence on expenses to open.
Beyond How Much It Costs to Purchase a Franchise
In addition to initial fees and buildout costs, franchisees often have to purchase inventory or equipment directly from the franchisor or from required vendors when they open. This can result in higher costs for inventory and equipment because the franchisee is required to purchase from the franchisor’s designated source of supply — there is no shopping around for the vendors that can provide the best services or goods while accounting for cost. Franchisors can usually generate a profit from sales of goods and services to franchisees, so a franchisee may end up paying more for inventory or equipment than they otherwise would.
There are also likely to be architect fees and, in some cases, engineering fees. These can both vary dramatically and be quite expensive.
In addition, landlords may charge rent before the franchisee even opens for business. This could be a sizable cost, among the most expensive and overlooked when considering how much it really costs to purchase a franchise, so it is important to consider not just the obvious expenses, but related or indirect expenses as well.
Finally, one possible expense that franchisees frequently overlook, is the expense associated with the obligation to remain open and operating for the life of the franchise agreement. The franchisor is only required to include estimated operating expenses for the first three months in its disclosure document. This does not mean, however, that a franchisee should expect to turn a profit or even break even after that initial three-month period.
Just about every day, we hear from franchisees that are losing money on a regular basis — they tell us that they want to just close down and move on. When you own a franchise, however, it is not as simple as cutting one’s losses and shutting down — abandoning the franchise is a breach of the franchise agreement and can result in the franchisor suing for and recovering lost future profits (e.g., the profits it would have generated from royalty payments had the franchisee continued to operate throughout the entire term of the franchise agreement). This is potentially a huge expense and must be accounted for when conducting due diligence.
Get Proven Legal Support Before Investing in a Franchise
If you want to purchase a franchise, get legal expertise from Garner, Ginsburg & Johnsen, P.A. Contact us today to schedule a consultation. Our franchise lawyers have years of experience and an excellent track record of getting positive outcomes for our clients, helping them get the most from their business investment.