Franchise Article

Exploring the Costs of a Franchise

Opening a franchise can be a great opportunity for would-be entrepreneurs. They provide plenty of benefits which will help you start your business off on the right foot. Before you get started, however, you need to understand the costs involved in getting started.

What Are Franchise Fees?

Franchise fees are expenses you will need to pay to the franchisor in order to get started. There are generally three types of fees you'll be required to pay: an initial fee, royalties, and advertising fees.

The initial franchise fee covers the costs of using the company's brand name and of receiving training on how to properly run the operation. For some franchises, this is a non-refundable fee so you need to be committed to your decision before paying this fee.

After your franchise is up and running, you'll be expected to pay royalties to the franchisor. These fees are a set percentage - usually 5 to 10% - of your gross earnings. That means these fees come up of the top before you deduct any other expenses from your revenue.

Additionally, some franchisors have an advertising fund that all of their franchisees contribute to. This fund pays for national advertising, for website maintenance, promotions, etc. These fees usually run between 1 to 3% of your revenue.

What are Typical Franchise Fees?

The best way to answer this question is with a couple of examples, so let's look at the franchise fees of two companies: Quizno's and Hobbytown USA. Quizno's is a fast food chain specializing in sandwiches similar to Subway. Hobbytown USA is a retail store which sells models, radio controlled cars and airplanes, model railroad equipment, etc.

For Quizno's, the initial franchise fee is $25,000 for the first operation and only $20,000 for any subsequent locations you want to open. The royalty fee is 7% of all gross earnings, which is about average. As far as advertising, there are two separate funds: a regional and a national. Franchisees pay 3% and 1% respectively into those funds.

Hobbytown USA has an even lower initial franchise fee of between $10,000 and $19,500. Their royalty fees are also lower: between 2.5 to 4%. Plus, there is no advertising fund to pay into. This means you'd be responsible for those costs on your own.

These two examples illustrate the range of franchise fees you're likely to encounter as you start searching for the right operation to work with. Keep in mind that the more popular franchises will be more expensive - McDonald's, for example, charges $45,000 for an initial fee.

Are Low Cost Franchises Available?

The answer is yes, but you need to remember that the franchise fees are only part of the bigger cost picture. Besides being able to pay those fees, most franchises do require a larger investment. For our two earlier examples, those initial investments are between $190,000 to $250,000 for Quizno's and $150,000 for Hobbytown USA. If you don't have that kind of money available, there are some options which require much smaller initial investments.

Merry Maids is one example. This company which supplies businesses and residential homes with affordable cleaning services charges a very reasonable franchise fee of between $19,000 and $27,000 and royalty fees of between 4 and 10%. However, all it takes to get started is an investment of $32,500. That's considerably less than our two previous examples.

Merry Maids is not alone. Other affordable franchise operations include Liberty Tax Service, Merle Norman Cosmetics, Curves (a women's fitness center), Re/Max, and more.

The most important thing to realize is exactly how much you're going to be expected to invest in your franchise in order to determine whether this is something you can afford to do (and remember there are financing methods available) and something you want to do.