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Calculating the cost of a franchise can be very complex. It is, therefore, nearly impossible to give an average cost of franchises in general. Franchise cost is something that must be assessed when certain factors are known. These include the franchise, the proposed business size, and the location.
There is a long list of factors that will affect franchise cost. To begin calculating, a person must first decide which industry she is interested in. There is a wide range to choose from including restaurants, retail stores, and Internet cafes. In many cases, if a person is able to choose an industry, she may be able to get an estimated range of the associated franchise cost.
More accurate calculation will require her to choose a specific franchise. Once she does this, she will have many important pieces of information that will help her determine the franchise cost. Each franchise generally has a franchise fee, which is an amount usually required upfront. This amount can vary and often increases with franchises that are well-known or highly successful.
Choosing the franchise will also generally allow a person to know the rate of royalties she will be subject to pay. Royalties are generally a percentage of sales or profit that is paid to the franchisor. If the amount is a specified figure, it will be easier to calculate. Otherwise, it will be necessary to take the percentage rate and to get an estimate by applying it to sales projections.
Buying and operating a franchise is usually a complex transaction. In many cases, it is necessary to employ the assistance of professional services, such as attorneys and accountants. Payment of these fees may only be necessary in the beginning or it may be necessary to calculate these as ongoing or periodic costs.
Another periodic cost is licensing. At a minimum, a business license is likely to be required for legal operation. In addition to this, special licensing and permits may be required for specialized industries or to obtain certain privileges, such as serving alcohol. In most instances, items in these categories will need to be repurchased or renewed.
Then, it is also necessary to calculate the cost of establishing and operating the business. Both the location and the size of the establishment will affect the franchise cost. Purchasing or renting commercial space in a major metropolitan area is likely to be significantly more expensive than the same amount of space in a rural area. Furthermore, the larger the establishment, the more employees’ wages that will likely need to be added to the list of franchise costs.
Once this is calculated, it is also necessary to add the costs of any inventory that will be required. Equipment and furniture must be added to the list of costs. When doing this, repair and replacement should be considered. Then, there are operational costs, such as electricity, water, and insurance.
@Sunshine31 -I agree with you. I wanted to add that many franchise companies require their franchisees to have enough operating capital to open multiple units.
This is especially true if the franchise is relatively new and the company wants to get its name out fast. I looked into a fabulous casual dining restaurant and sure enough they required you to open at least five locations which meant that you had to have a couple million dollars.
But I know that this restaurant will make a lot of money because their food is so fresh and tastes so different than anything else out there that it does not seem like that much of a gamble.
I think that
with franchises you also have to be careful that they are not issuing licenses that cut into your territory. I had a friend that bought a supplemental education franchise that was upset because they allowed another center to open within two miles of her location.
In fact the company closed some of its centers which I think is a red flag that maybe the franchise is growing too quickly or has reached maximum potential and might be on the decline.
@BrickBack - I know that a lot of fast food franchise costs are among the highest because of the franchise fee and the operating costs.
Some fast food franchises require prospective franchisees to actually work in their restaurant before they would consider you as a franchisee. I learned this because my mother in law wanted to invest in a fast food franchise, but did not want to work there.
This is really so that you understand the business and become actively involved managing it because you will be more successful if you are onsite and working in the actual business instead of hiring someone to manage it.
Also, although the fast food franchise is often very profitable not everyone is cut out to own and manage a restaurant because they do require a lot of capital and long hours.
@Crispety - I think that the travel agency business sounds fun although with the internet, I wonder how that affects their business. People are generally really happy when booking a vacation so I am sure that the majority of the customers are nice.
I have also seen a lot of the commercial cleaning companies do well in the franchise standings and require very little money to get started. I just don’t think that I would have fun cleaning offices. That sounds like something that I would rather hire someone to do, but I hear that there are business owners that earn six figures in this line of work.
I agree and want to add that there are many low cost franchise opportunities that can allow you to open a business with $10,000 or less. Some of these opportunities are home based business in the travel industry or supplemental education like at home tutoring franchises.
These low cost franchises are easy to operate and allow you to slowly build your business without incurring leasing or other operating costs that would make the business more risky.
With a few thousand dollars you can open a travel agency focusing on cruising. In fact with one company in particular there is extensive training and you do not have to have a travel background in order to enter this industry.
I think that that is another nice benefit to franchising. You really can go into a totally new field and learn a lot while making money.
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