Every new business, be it franchise or independent venture, has startup costs. The advantage to franchises, however, is that the parent company generally provides an estimate of the initial required investment. Yet, as vital as this information may be, it’s often based on averages across the entire franchise. Employers usually must do some investigative work of their own to determine the true cost of ownership.

How do you determine franchise startup costs?
Franchise startup costs vary widely based on the franchise brand, industry and location. That’s why the best way to estimate expenses is to seek financial information directly from the franchisor or other franchisees.

Ask for a franchise disclosure document (FDD)
Franchisors generally are required to provide an FDD to prospective franchisees within 14 calendar days prior to any signed agreement. Item 7 of this document estimates the funds needed for the initial purchase and the working capital thereafter. It also typically outlines the payment method, due date and refund status for each expense.

How are franchise fees determined?

When franchisors set their franchise fee, which is essentially a licensing fee, they typically choose a price that is both attractive to prospective franchisees and comparable to competitors in their market. The fee also may depend on how much the franchisor expects it will need to cover the cost of salespeople and any initial resources provided to new franchises.

Typical franchise startup costs

In addition to the franchise fee, franchisees can expect to pay startup costs related to the following:

  • Real estate and property improvements
    Location expenses typically consist of down payments on mortgages, commissions paid to real estate agents and security deposits for utilities. If improvements to the property are needed, additional costs, such as materials and labor, may be incurred.
  • Professional services
    New construction may require the assistance of architects and engineers, as well as lawyers to help with zoning permits and other legal concerns.
  • Supplies and equipment
    Examples include product inventory, point of sale devices (POS), general office supplies, cleaning products, smallwares, etc. Keep in mind that service-oriented franchises run out of a home or office usually need less supplies than those that sell goods.
  • Furniture and fixtures
    In some cases, franchisors will ask that all their franchises use the same type of furniture. In others, the franchisee may be able to use their existing furniture.
  • Insurance
    Like other businesses with employees, franchises need to purchase workers’ compensation insurance. Those that have a physical location also require property and casualty insurance, while mobile-based businesses must carry auto insurance.
  • Training
    Employee training may be covered under the franchise fee, but related expenses, such as travel, lodging and meals are usually paid separately.
  • Advertising and marketing
    Although individual franchises are generally responsible for their own signage, advertising expenses may be shared across multiple franchises.
  • Working capital
    Franchises may not turn a profit right away, so franchisees should have enough money upfront to cover their operating costs and living expenses for up to three months or longer.

Setup cost for shop in shop starts with thechocobean at 10,000€.

Franchise startup costs with thechocobean at 30,000€.

How to finance the cost of starting a franchise

Starting a franchise generally requires more money than most people have on hand, but financing options are available. Franchisees that are able to secure a business loan typically follow these steps:

  1. Work with the franchisor
    Franchisors may partner with lenders to create custom financing programs that cover the cost of franchise licensing, equipment, resources and other expenses.
  2. Apply for a commercial bank loan
    Much like a mortgage, these types of loans have rates and terms that vary with personal credit history; a business plan may be required.
  3. Consult the Small Business Association (SBA)
    Although the actual funds are provided by an intermediary lender, the SBA guarantees a portion of repayment, so interest rates and terms are usually more favorable than commercial loans.
  4. Seek an alternative lender
    Investors outside the traditional banking system may be willing to fund a small business operation, but the interest rates are typically high and the repayment periods short.
  5. Consider crowdfunding
    Prospective franchisees can create and promote their own crowdfunding web page or leverage existing third-party sites that crowdfund on behalf of specific business types and industries.
  6. Ask a friend or family member
    Borrowing money from personal relations is a common way to fund a business, but it could cause conflicts if the terms of the loan aren’t agreed to by both parties in writing.