When answering the question how to choose a franchise, it’s important to consider a variety of factors like costs, franchise fee, type of industry, locations, skills needed, and franchise policies. Ideally, the right franchise to invest in should fit your budget, is complementary to your skill set and background, and is one with a sound exit strategy.
If you’re also wondering how to fund the purchase of a franchise, consider a rollover for business startups (ROBS). A ROBS allows you to use $50k or more of your retirement savings to start a franchise without early withdrawal penalties or taxes. Fund the whole purchase or just the down payment on an SBA loan. Speak with a ROBS expert at Guidant to see if you qualify.
Franchise Costs: Franchise Fees, One-Time Costs, & Ongoing Costs
Investing in a franchise requires a considerable amount of capital to cover the franchise startup costs. Total costs will vary depending on the industry type, brand, and location. For example, residential cleaning and remodeling service franchises range between $20,000 to $50,000, but restaurants and retail franchises can cost as much as $1 million.
Knowing what costs you need to pay is one of the important steps in buying a franchise. These costs include any one-time startup costs like a franchise fee, as well as any ongoing franchise costs. Let’s now take a look at these different expenses you’ll need to consider when choosing a franchise.
One-Time Franchise Startup Costs
Below are few of the most common one-time startup fees associated with a franchise:
- Franchise fee – This is the payment you make to the franchisor for joining the franchise and for the rights to use its brand name.
- Commercial real estate lease – This refers to the cost of leasing a property where you will operate your franchise. Some franchises will require you to buy or build your own property rather than leasing it.
- Training and related expenses – This represents your training fees, which includes travel, lodging, and living expenses during the entire training period (which usually lasts a week or two).
- Equipment costs – The amount of money you need to invest in equipment needed to run the franchise. You should also include the costs of other equipment such as computers, POS, security systems, other appliances, and furniture.
- Cost for initial merchandise – Cost to buy the initial inventory you need for your franchise.
- Insurance fees – The cost of insurance that you need to purchase if it’s mandated in terms of the contract.
- Other fees/expenses – Other fees related to opening a franchise, including permits, legal and accounting services, grand opening advertising, and other professional fees.
Ongoing Franchise Fees & Other Expenses
Aside from the typical franchise costs mentioned above, there are ongoing fees that you have to consider. A few examples of ongoing franchise fees include a royalty fee and advertising/marketing fees. Other ongoing expenses include your operational expenses such as salaries and wages and utility expenses.
Let’s discuss each of these ongoing fees below:
- Royalty fee – This is typically a percentage of your gross sales, usually between 3% to 8%. The amount varies depending on the franchisors.
- Advertising fee – There are some franchises that require franchisees to contribute a certain amount of money to regional and national advertising. This is typically calculated based on a percentage of a franchisee’s gross sales, which range between 2% to 6%, and varies per franchisor.
- Operational expenses – These are expenses needed to operate your business on a day-to-day basis, which include salary and wages, utility expenses, and other relevant operational costs.
Although these ongoing costs typically won’t factor into your initial investment, it’s important to be aware of them while you’re choosing a franchise to buy and operate.
How to Budget for These Franchise Costs
Depending on the industry, your initial investment can be as low as $200,000 or as high as $1 million. While there are different funding options available, you need to know how to budget for your franchise costs efficiently. Below are two rules of thumb to help you figure out how much you should spend and borrow for a franchise:
1. Don’t Invest More Than 15% of Your Net Worth
Experts recommend that you shouldn’t spend more than 15% of your net worth on the initial investment. You can use our free net worth calculator to better understand how much you should invest. For example, if your net worth is $300,000, the most you should spend out-of-pocket is $45,000.
2. Borrow Funds from a Bank or Lender
If 15% of your own money is not enough for the total investment needed to open a franchise, then you may have to borrow funds using different franchise financing options. Banks typically require a 25% down payment from the borrower. So, to figure out your max budget, take number 15% of your net worth and multiply that number by 4. This is your max budget, assuming a 25% down payment.
Based on our example, your out-of-pocket investment should be $45,000. If you multiply it by 4, you get a budget of $180,000 for your franchise costs. Borrowing gives you more options when it comes to choosing a franchise.
How to Find Franchises for Sale
Once you have a budget in mind, the next thing you need to do is to find franchises that match your budget. You have the option to do your own research and look for franchises that are a good fit for you. You can also hire a franchise broker to help you find the right match based on your budget, skills, professional background, and personal interest.
1. Find a Franchise on Your Own
There are many franchise opportunities available that you can find on your own. For example, there are franchises that cost less than $10,000 as well as bigger franchises that cost millions in upfront investments. You can find franchises for sale with different online resources such as:
These platforms and directories allow you to filter your search based on industry, cost, and location. They can provide you with a list of available franchises, a general overview of costs and policies, and a brief background of the business. You can do further research and check for reviews by other franchisees so you know what to expect. For more information on finding a franchise you can read our guide on franchises for sale.
2. Use a Franchise Broker
Franchise brokers work like matchmakers that connect prospective buyers to franchisors. While there are reliable franchise brokers, there are many others who are scammers – so it’s wise to be extra cautious when dealing with one. Still, some brokers don’t charge potential buyers and instead charge the franchisor, so it’s not a bad idea to work with a broker while you also do your own research.
Generally, there are two types of people referred to as franchise brokers:
- Franchise Consultant – A person who helps you search and screen your options, but who is not directly involved in the sale of any franchise. True franchise consultants work on a fee-for-service function, and you pay them upfront for his/her help in matching you with a franchise. The cost of a franchise consultant varies from one consultancy firm to another but typically ranges from $10,000 – $15,000.
- Franchise Salesperson – A person directly involved in the sale of a specific franchise. Salespersons typically don’t charge you fees for their services. Instead, they earn commissions from the franchise companies when you buy a franchise.
If you’re considering a broker, working with a salesperson is not really advised because their recommendations may be biased based on which franchise companies give good commissions. A consultant, however, will help you save time and effort by helping you find opportunities that match your budget, skills, and preferences – for a fee. If you want to save money, you may want to do your own research.
Find a Franchise
Use the following drop-down search menu to see your franchise options based on the type of industry, location, and initial investment cost.
How to Identify a Franchise That’s a Good Fit
Once you have narrowed down your options to 2 or 3 franchises based on your budget, personal interest, skills, and experience, the next step is to contact the franchisors and learn more about their policies and procedures. Although you can find most of this information from various online sources, it’s still good to contact the franchisors directly so you can ask specific questions.
A few things that you should ask/figure out include the following:
- What are the rules and regulations that are non-negotiable?
- Does your personality vibe with the people managing the franchise?
- Can you communicate with them well – via phone, email, or in-person meetings?
- Are your mission and vision in line with the mission and vision of the franchise company?
- How much freedom you want as a business owner, and does the franchise allow this freedom?
- Do you want to run your own promotions and campaigns, choose your own suppliers, manage your social media accounts, and change your business hours?
While some franchises are laxer, there are others that are tightly regulated. Aside from its costs and your personal interests, determine whether you’re willing to follow their rules and regulations and whether you’re comfortable working with the people behind the franchise company to know if it’s a good fit.
When to Choose a New or Existing Franchise
Generally, it takes about 2 to 12 months to get a new franchise off the ground. If you want to get started faster, you have the option to buy an existing franchise. When you buy an existing franchise, known as franchise resales, you skip the process of finding a location, hiring/training staff, and building your customer base.
However, franchise resales can be more costly compared to a new franchise, especially if the existing location has strong customer base and sales. If a franchise resale is sold at a bargain, it might mean that it isn’t performing well and there might be hidden problems inhibiting its growth, so you need to be extra careful.
Many franchise owners prefer to start from scratch. It means they are willing to go through all the tasks that need to be done when starting a franchise, such as choosing the location, leasing new equipment, and building a staff. However, if you don’t want to go through all this, then franchise resales may work better for you.
Read our article about franchises for sale to see which websites post franchise resales.
How to Plan Your Exit Strategy
Your plans for the future can make a big impact on the type of franchise you choose. If you plan to sell your business after a few years, it’s better to know what the process for selling will be like, how likely and quickly you can sell the franchise, and how much you can possibly earn. This is why it’s important to value your potential business correctly using factors like assets, liabilities, and earnings.
On the other hand, if you plan to keep the franchise long-term and perhaps grow your business to more locations, you have to consider the scalability of the franchise. Consider the market share and demand within your desired industry, and see if it has the potential for long-term growth. For instance, a food service franchise could more in-demand and scalable than a tutorial service.
Below are a few examples of the costs of various popular franchises. The total initial investment includes all the main costs associated with opening a franchise, such as franchise fee, property lease, equipment, insurance. Franchise costs can vary depending on the type of industry and location. In some cases, it can actually be cheaper than the minimum amount shown. In other cases, it can be more expensive.
Home Improvement & Lawn Care
Health & Fitness
Tax & Finance
Children’s Products & Services
Bottom Line: How to Choose a Franchise
The franchise you choose will affect your life for the next several years, even if you plan to sell it. Despite owning a business, the franchisor’s rules and policies will still dominate and you need to strictly abide by them. For this reason and more, when considering how to choose a franchise, you need to choose one that’s a good fit for your interests so the venture is both profitable and enjoyable.
If you’ve already answered the question how to choose a franchise and are in need of funding, you can use your retirement fund to start a franchise with a rollover for business startups (ROBS). A ROBS allows you to use $50k or more of your retirement savings to start a franchise without early withdrawal penalties or taxes. Speak with a ROBS expert from Guidant to learn more.