Step 2: Educate
Learn more about the common costs and fees of owning a franchise, how much you can realistically afford, and get familiar with the common terms and “lingo” of franchising.
Educating yourself on all aspects of owning a franchise will set you up to confidently navigate the research and purchase process. It’s important to take time to learn the lingo, investment requirements, agreements, fee structures, and financing options. Even if you feel financially comfortable investing in a franchise, it’s also important that you feel excited about the brand, its corporate leadership and your network of fellow franchisees. As you educate yourself and work through this process, be sure to keep a check on where you find your passion going. Are you still excited with the concept of owning a franchise?
Let’s keep going…
Franchise Fees and Other Costs
Starting a business is an exciting process, but it does cost some money. When launching and growing your new franchise, many of these costs will come in the form of fees. The nice thing about franchise fees is they are scheduled and laid out in advance for you, which makes your financial planning easier. Fees and costs can range from attorney fees, marketing and advertising expenses to royalty payments and franchise fees. Want to delve deeper? Check out our article on common franchise costs and fees.
How Much of a Franchise Can You Afford?
Franchise opportunities come in a wide range of startup costs, with some businesses starting under $10,000 and other investments ranging into the millions. Like buying a house, most entrepreneurs make a down payment on their business and finance the balance with a business loan that is paid back over time.
So how much business can you realistically afford? There are many variables, but for someone with a good credit rating, we suggest a 3X rule of thumb. In other words, if you have $10,000 to invest in a business, you should limit your search to businesses with a total initial investment of $30,000 or less. Likewise, if you have access to $50,000 in personal capital, you can expand your business search to include franchises with a total price tag of around $150,000.
Creating a personal financial statement listing your current assets and debts is a good place to start. We also recommend talking with local commercial bankers to understand what financial requirements they may have. Ultimately, only you can determine what investment level will make you comfortable when making the choice to buy a franchise.
To assist you in your search, we have compiled our list of top franchises into the investment levels below. In addition, we have created a downloadable Franchise Financial Planning workbook that will help you organize and better understand your potential business investment.
Learning the Lingo
The contract between you and the franchisor to open one or more franchise business(es)
A lengthy standardized document required in the U.S. for all companies offering a franchise opportunity containing many details around the company
One component of the initial investment that allows the franchisee to use the franchise brands name and likeness
This is the sum of money that you as the franchisee would pay typically monthly to the Franchisor as per your franchise agreement. Typical royalty fees are under 10% of gross sales but do vary by franchise brand
This would be the initial costs that go into starting up the franchise including franchise fee, construction costs, equipment purchases, legal fees etc
This is part of the contract that outlines your role as a franchisee and what is expected of you