Is your small business booming, and you are looking into expanding? Franchising your business can be a great opportunity, but it could get expensive. Read how much franchising really costs.
So You Think You Want To Franchise
If you’re looking to expand your successful small business after a few years of sky-high sales and customer demand you can no longer meet, franchising may be a good idea. It can also be a great opportunity you can give to current employees or family members who you know you can trust.
When you sell a franchise, you will receive a franchise fee, but you won’t retain much of that fee after all your expenses. You really make your money from ongoing royalties.
This is where it is important to choose the right person to be your franchisee. Similar to choosing a good business partner, you need to be able to trust this person to successfully run a business and work well with you. If you allow the wrong person to franchise your business, you could lose money and your business’ good reputation.
Once you decide that franchising is the direction you want to take, consider hiring a consultant. Being a business owner-operator is very different from managing and opening franchises. This is a complicated process legally and financially, so you’ll want someone who is already an expert to help you.
Who Pays For What?
It may be confusing at first to understand your costs as the franchisor versus what your franchisee will pay for themselves. Here is a brief rundown of who pays for what:
You will cover:
- Marketing materials and collateral: You need to attract franchise buyers, develop a cohesive handbook for your franchisee, and advertise to your community that a new location is opening once everything is settled. Depending on your own skill level versus hiring professionals to help, this could cost a few thousand dollars.
- Training and supporting your franchisee: You want to maintain quality control and your business’ reputation, so you will need to spend a considerable amount of your time to train them and support them when the franchise is open. You may also need to pay current employees to mentor and train future employees for the new location.
- Hiring a franchise lawyer: Hiring a specialist lawyer can cost you upwards of $25,000 to set up the franchise and keep them on retainer for at least a couple of years. You may even need to change your business structure. As the laws and taxes surrounding franchises are incredibly complicated, this is a step you should not skip unless you have a law background yourself.
- Legal and regulatory fees: In addition to filing initial paperwork with your state’s attorney general – which can range from $1,000 to $2,000 depending on where you are located – you will have yearly costs. The FTC requires a lot of compliance for franchising. Take a look here for a guide on how to comply. Have your lawyer go over it with you.
- Taxes and Audits: Taxes are never fun or easy, especially when you have a business and are making changes. Franchised businesses must be audited every year, so your accountant fees will probably increase as well as possibly thousands of dollars in extra taxes. Look through your state’s Franchise Tax Board for more information.
They will cover:
- Initial franchise fee: When you sell a franchise, you will charge them a fee (which averages around $30,000 and will go towards helping you cover all your initial costs).
- Real estate: While you may want to help when selecting where the new franchise will be, the franchisee typically pays for all real estate and related costs including insurance, rent, property taxes, maintenance, etc.
- Startup costs and working capital: When it comes to all the usual costs associated with starting a business, you shouldn’t pay any of that. The franchisee pays all expenses for hiring and training new employees, decoration not already provided by you (according to your guideline that you will need to create), inventory, taxes, payroll, and more. You started your own small business, you know these expenses like the back of your hand.
- Ongoing royalties: This is where you make up for all your costs and start making a profit from your expansion. Carefully calculate the percentage you’ll charge, because over time the difference between 5% and 6% will add up in missed profits.
Need more information or want to find a franchise consultant? Check out the International Franchise Association. Need a small business loan to cover some of these costs before the royalties start rolling in? Call Opportunity Fund today.
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