How to Identify the Real Franchise Costs

Do You Know How Much Your Franchise Opportunity is Costing You?

If you are an entrepreneur at heart, you have likely evaluated the opportunities presented in franchises. One of the most prominent questions that most potential investors have is, “How Much is the Real Cost of a Franchise Opportunity?” While the basis of any franchise operational cost will include fees that pay the franchise to become an owner operator, understanding the fees, what they pay for and if they are reasonable are all important things to discover prior to investing in the opportunity.

Uniform Franchise Offering Circular

The first thing to become familiar with is the Uniform Franchise Offering Circular (UFOC), as all of the fees associated with the franchise opportunity must be disclosed here. Here is a breakdown of some of the fees that will be disclosed in this document and how they will apply to you:

Initial Franchise Fees

There is often a one time, up-front fee required to invest into a franchise as a franchisee. The fees required up front will vary by opportunity, and will range from $10,000 to over $100,000. Consider the benefit and the brand that you are acquiring, as this will help you to determine the benefit that you will be gaining by investing this fee with the franchise.

Ongoing Fees

In many cases, these ongoing fees are referred to as royalties and are customary with almost any franchise opportunity. These fees may be a portion of the total revenue generated by your unit or a fixed fee. These fees will range depending on the franchise opportunity, but you can expect them to be between 5-6% per year of your annual revenues.

Marketing and Advertising

As in any business, marketing is an important component as it will keep the brand presence strong as well as keep customers walking through the doors. In some cases, marketing costs are left entirely up to the individual franchisee, where others will have national programs that require each franchisee to contribute a portion of their revenues. If the fee is a fixed annual fee, they often will range from 1-4% of the franchisee’s total revenues on an ongoing, annual basis.

Inventory

Many franchises will require their franchisees to purchase products on an ongoing basis. If this is the case, the products are often offered at a discounted price. Be sure to research what you are paying to ensure that the prices are competitive or lower than what you would be able to negotiate on your own.

Profit Planning

While fees are going to be associated with a franchise opportunity, the real cost is directly associated with the net profits that you are taking home as a franchisee. You will want to take into consideration both the initial investment over time and how that affects your profits as well as the ongoing fees. Be sure to keep a close eye on your profit percentage quarterly and annually so that you can assess whether the opportunity is profitable for you. If not, ask for help and look for ways to generate additional profits within your franchise unit.

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