If you’re thinking about buying a franchise, you may be wondering just how much money you’ll need to get started. Franchise startup costs vary widely, with some businesses available for under $10,000 while others can require investments in the millions. Much like buying a home, most entrepreneurs make a down payment on their franchise and finance the rest with a loan, which they pay back over time. So, how much should you expect to have on hand to buy a franchise?
Don’t let fear of the unknown slow your progress to business ownership. In this article, we’ll discuss how to plan for your initial costs, how to determine the amount you’ll need to finance, and recurring costs and fees to work into your budget. In general, a good rule of thumb is the “3X rule”: Determine the amount you have available to invest and multiply that by three to find the franchise price range you can afford. For example, if you have $10,000 in capital, look for franchises with a total cost of $30,000 or less. If you have $50,000 cash on hand, you can look at franchises in the $150,000 range.
How much money do you need to buy a franchise? It depends on your unique financial situation and goals.
Franchise Costs by Industry, Type, and Location
Depending on the type of franchise, the industry it’s in, and your location, the initial investment needed to start a franchise can vary. Generally, most franchises require an investment of between $100,000 and $300,000. However, some low-cost franchises can start as low as $10,000 – $20,000.
The type of business, for example, a brick-and-mortar storefront versus a home-based business model, can have very different upfront and ongoing costs. Understanding your unique interests and financial situation will help you determine the investment level and how much you’ll need to finance.
The franchisor (the company selling you the franchise rights) typically has a minimum cash amount required and an all-in investment cost. The franchisor should also help you determine how much working capital you’ll need to cover initial operating expenses. Some franchisors require only a few months of working capital to get started, while others may require you to have funds available to cover a year or more until the business becomes profitable. Once you narrow your search to one or two franchise opportunities, be sure to have the financial requirements clearly outlined by the franchisor.
Key Factors Affecting the Cost of a Franchise
If you’re going to buy a franchise, be sure you understand all the associated upfront and ongoing franchise costs. Let’s break down the main expenses you’ll encounter:
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Franchise Fee
The franchise fee is the upfront payment required to operate a franchise in a specific location. This fee typically includes training, support, and other services provided by the franchisor. Additional costs may be associated with joining the franchise, which are detailed in the Franchise Disclosure Document (FDD). Be sure to review this document carefully to understand all associated costs. -
Real Estate Costs
If your franchise requires a physical location, you’ll need to consider real estate expenses. This includes leasing or buying property and the costs of construction, fixtures, appliances, furniture, signage, and other necessary equipment. If you choose a home-based business, you’ll avoid real estate and build-out expenses altogether. -
Equipment and Inventory Costs
Just about any business you invest in will need initial equipment and supplies to get started, and franchises are no exception. Many franchisors have deals with vendors, which could mean inventory discounts. Make sure you understand these costs, as they can add up quickly. -
Construction Costs
For brick-and-mortar businesses, construction or renovation costs can be significant. This may cover everything from building and fixtures to appliances and signage. For home-based franchises, there may still be associated equipment costs, but you’ll avoid major construction expenses. -
Advertising and Marketing Costs
Franchise businesses often charge for marketing, advertising, and lead generation to help you grow your business. Some franchisors include these services in the franchise fee, while others charge separately. Clarify these costs upfront, so you know exactly how much to budget.
Developing a Financial Plan to Buy a Franchise
How much money do you need to buy a franchise? As discussed, you’ll need to determine your current cash on hand first. Start by creating a personal financial statement that lists your assets and debts. This will give you a clear view of how much capital you can invest and how much you might need to finance. Getting financial advice from an accountant and a franchise financing firm can help you understand both your available cash and lending options.
To help with financial planning, Franchise Business Review offers a downloadable Franchise Financial Planning workbook. This tool helps aspiring franchise owners organize their finances and better understand the costs and commitments associated with a franchise business.
Ultimately, only you can determine what investment level feels comfortable for you, but with careful planning and research, you’ll be well-equipped to make an informed decision about buying a franchise. Explore FBR’s franchise financing resources to learn more.
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