The Real Cost of Owning a Franchise
The initial franchise fee or “Sticker Price” varies widely among franchise systems, but regardless of which franchise you choose, you can count on there being a lot of additional costs.
So what kind of additional costs of owning a franchise can you expect?
Leasing/Purchasing a location
You will need to do market and demographic research to choose a proper location within your territory. Once you choose your location, you are more or less stuck there unless your franchisor gives you permission to move. That means if your landlord decides to double your rent, you may be forced to pay the higher rent if your franchisor will not approve a different location.
Buying Equipment and Materials
It is not uncommon for franchisors to require franchisees to purchase from specific suppliers that may charge more than unapproved vendors. Your franchisor will often receive a kickback while you cover the extra costs.
You may be able to figure out the costs of the current required purchases before you buy the franchise, but your franchisor can introduce new products or equipment in the future and require you to purchase them in order to stay in compliance.
Franchisees are required to pay into marketing funds that the franchisor can spend as they please. Many franchisees begin paying these fees before they even open their location.
Franchisees also have little to no say on the type of marketing efforts used or the advertising campaigns. So if the current advertising efforts are not effective in your location, you will be forced to continue paying for something that in no way benefits your business.
Franchisors use the marketing funds to advertise on a national scale, so you will be expected to pay for any local advertising out of your own pocket.
You need to factor in the amount of employees you will need to keep your business running smoothly. Do you need skilled workers with specialized skills that will require a higher hourly wage? Will you be able to pay minimum wage? Keep in mind that the cost of higher and training new employees is much higher than keeping employees, so you will want to pay your employees what they are worth to keep them from leaving your business for a better job.
As soon as your business starts bringing in money, the franchisor will start taking their cut. With all the extra costs, this may leave you unable to pay yourself, or even using your savings to cover operating costs until you can earn enough profits to cover everything.
Franchisors love telling potential franchisees that they will be earning money within a couple of months after opening. This often means that customers will be walking through the door and paying for products or services, but it doesn’t mean you will be in the green after covering all your costs. The truth is, you need a large savings account ready to cover costs, living expenses, and/or emergencies for at least a year or two after opening.
It’s incredibly important to factor in all the possible costs of operating a franchise before you make this very serious investment. Contact the Law Office of Jonathan E. Fortman for more information or a consultation!