Initial Expenses Needed to Set Up a Franchise

By Michael H. Seid, Joyce Mazero

You will incur many costs in the development of your franchise. Some, such as the franchise fee, you have likely thought about. Others, such as travel and living expenses while you’re at training, as well as pre-opening labor, may not be so obvious. The following will highlight some of the more material costs you should anticipate.

The franchise fee

The franchise fee you pay is your price of admission to the game, but not the price to suit up and play. The franchise fee is the amount you pay the franchisor initially to become part of the system.

Internally, franchisor’s generally set this fee to offset their cost of locating, screening, negotiating with, and training you. They also use it to cover the costs involved in site selection and development, promotions, grand-opening events, and ongoing support during your first months of operation. They set their fees also based on what they believe is the attractiveness of the investment opportunity and, of course, how competitive the marketplace is in attracting and securing franchisees.

Don’t fall into the trap of thinking that you are paying your franchise fee in exchange for services and support. All the initial fee gets you is entrance into the club. A higher fee does not indicate more startup assistance any more than a lower fee means you will get less support. Carefully read your franchise agreement to determine what support and services your franchisor will be providing to you. Regardless of what the franchise salesperson or franchise broker tells you, if it is not written in the franchise agreement, it probably won’t happen. Generally, the franchisor is not obligated to provide you with any additional services and support other than as provided in the agreement.

Franchise fees vary, depending on the franchisor. They can range from $0 (which is very unusual) to more than $100,000. Typical franchise fees today range between $20,000 and $45,000, with the average franchise fee of around $37,500, but that’s highly dependent on the industry and the franchisors in that industry group.

If you’re planning on opening up more than one location and will be signing a multi-unit development agreement, you can expect your initial fees for your additional locations to be less than what you needed to pay for your first location.

Each franchise system is different — even in the same industry. As with every contract, first review the agreements with an experienced franchise lawyer.

Other costs: Building out your franchise location

Many potential costs are included in your initial franchise investment, in addition to the initial franchise fee. In particular, make note of the following:

  • Costs for finding the right location
  • Civil and architectural drawings and professional fees
  • Contractor fees
  • Construction and leasehold improvements
  • Décor packaging and signage
  • Equipment and fixtures
  • Freight and sales tax
  • Hardware and software
  • Insurance deposits
  • Landscaping
  • Licensing and permits
  • Opening inventory
  • Rent deposits and occupancy charges
  • Security system
  • Utility deposits
  • Zoning expenses
  • Other prepayments

Training staff for your franchise

Before you open up your business, expect your franchisor to require you and some of your key employees and management to attend training. Most franchisors take training seriously, and, depending on the complexity of the business and the philosophy of the franchisor, you can expect to spend as little as a few days and sometimes many months being trained in how to operate your new business.

Most franchisors will include the cost of providing you, your initial unit manager, and your trainer with training in the initial franchise fee. Depending on the franchisor, it may also provide training for additional management and staff. If you are a multi-unit developer and won’t be managing the unit directly (someone else will be responsible for the day-to-day management of the business), your franchisor may have a shortened training program as an overview for the business owner.

Also, don’t forget the salaries and benefits for your staff attending training with you. You should anticipate other costs as well. Although the cost of tuition for initial training is often included in the franchise fee, as mentioned, you will probably have to pay for airfare, hotel accommodations, local transportation, food, salaries, and employment benefits for yourself and any of your staff who attend training. These expenses are on top of any salary you will lose from your current job while you attend training.

Pre-opening labor for your franchise

Before you even open your doors and collect dollar one, you must pay your management team and staff. Your employees will help you set up and will need to learn how to run the business before that first customer comes in.

Professional fees for your franchise

In addition to your architect and the professionals you hire to help you get through zoning and local approvals, you need the services of an attorney to help you negotiate your lease and do all the other legal work required to set up a business. You also need an accountant to help you set up your books and records. And don’t forget the cost of the franchise lawyer you smartly engaged to help you evaluate the franchise opportunity originally.

Working capital for your franchise

Working capital is the amount of money you need to support your ongoing expenses that are not covered by your revenue (the money your business brings in). Depending on your business, you may need as little as two or three months or as much as two or three years of working capital. Although your franchisor will include in Item 7 an estimate of the working capital you will need, it is best that you consult with an accountant in coming up with your own estimate.

When planning for your initial investment, remember that projections — especially regarding working capital — are not a guarantee of what you will actually need. Projections are educated guesses based upon the best facts available at the time. Be conservative and don’t plan on the best outcome.