You can make a lot of money by becoming a franchise operator. However, like the old saying goes, it takes money to make money, and franchising is no exception. A franchise is an investment, and your goal as a franchisee is to maximize your return.
But what, exactly, does that investment entail? In terms of amount, the costs associated with starting a franchise can vary greatly depending upon the franchise system, location, exclusivity options and a host of other factors. However, the types of expenses are more clear cut, and generally fall into one of two categories — initial costs and recurring costs.
Initial Costs For Franchisees
Initial costs, also referred to as one-time costs or assets, are items you will need to use over the life of your business and are typically paid for before you even open your doors. Here are some examples:
THE FRANCHISE FEE
The franchise fee is, in essence, the entry cost for joining the system. At a minimum, it gives you the right to use the franchise’s names and assets. However, a franchise fee can also cover training, marketing, operational support and territory protection. Make sure you know exactly what you are getting in exchange for your money before paying a franchise fee.
EQUIPMENT & SUPPLIES
Depending upon the franchise, it may be necessary to purchase furniture, computers, office equipment, supplies and other things that aid in the day-to-day operation of the business. Paying for these items can be accomplished via purchase or lease, and it’s important to understand the pros and cons of both options.
Creating a corporation ensures separation between your personal and professional financial liabilities. Since an incorporated company is considered its own entity, you, as an owner, are not legally liable for the corporation’s debts. There are four separate elements of incorporation fees — a first-year franchise tax prepayment, fees for filing articles of incorporation, fees for miscellaneous government filings and attorney fees.
Most franchise systems require you to purchase a storefront, office space or warehouse, and the down payment on commercial property is typically the most expensive component of any budget. However, Bin There Dump That offers financial (as well as work-life) flexibility by allowing our franchise operators to work out of home offices.
DAY ONE MARKETING MATERIALS
When you open a new business, it’s important to let others know it. Marketing materials such as signage, business cards and promotional fliers can help you spread the word and drum up customers.
A vast majority of businesses need permits or licenses to operate legally. However, permit and licensing requirements can vary greatly depending upon your location, the type of business you operate, and government or industry regulations. Consult with your local Small Business Administration chapter or your franchise lawyer to make sure you attain the documentation and rights you need.
Not all franchises require you to purchase a vehicle, but it’s a good idea to have a separate vehicle for work use and personal use, especially if you consider insurance and legal reasons. Of course, a vehicle is essential if you are running a mobile franchise like Bin There Dump That.
Whatever widget you are selling, you will need enough of it in stock to meet initial demand. Some franchise systems require you to purchase a minimum amount of inventory, while others let you set your level of initial investment.
Recurring Franchise Costs
Recurring costs are expenses you can expect to pay on an ongoing basis. They include:
RENT & MORTGAGE
If you do have to acquire a commercial space, you can expect to pay a monthly cost for the right to remain in it. When you rent, the costs can go up unexpectedly; but if you own the property, you will have more control. Of course, the latter option usually requires a larger upfront investment.
When it comes to taxes, nobody likes to pay them, but everyone — in every business — does. Franchisees are no exception.
Utilities: Beyond keeping comfortable with things like heat and water, utilities for a business are all about keeping connected with customers. Costs will include phone lines, high-speed Internet and mobile service.
When your initial inventory runs out or breaks down, or when it is time to grow your franchise, you’ll need to make sure you are in the financial position necessary to acquire more inventory — or you’ll be stuck. A good way to keep your inventory costs low is to invest in a franchise that provides durable, long-lasting inventory of key items. For example, at Bin There Dump That, our bins are virtually indestructible, which can eliminate the costs and headaches associated with constantly replacing equipment.
All franchisors require royalty payments, which help fund product and research development, marketing, training and continuous improvement initiatives at the franchise system level. Royalties are typically a percentage of income or profit, which penalizes franchisees for doing well. At Bin There Dump That, however, we don’t want to penalize our franchise operators for their success, so we charge a simple, straightforward cost based solely on the number of franchise trucks in your fleet.
There are six types of insurance that franchisees should know about, and we broke them down in detail in a recent post.
MARKETING & ADVERTISING
Marketing is a 24/7 proposition and is essential to the success of any small business or franchise. There are a limitless ways to market your company, but it is important to focus on the marketing tactics that produce the best return on investment.
The people in your organization will have the biggest impact on your success. Unfortunately, for most companies, they also have the biggest impact on the budget. Employee salaries are the biggest line items for many businesses. You should strive to provide a fair salary for your market. To do so, speak with other businesses in your area to gauge salary data or use online sources such as salary.com or glassdoor.com.
Invest In Learning More
Franchise costs are just one part of the big picture when it comes to the finances of a franchise, and we can help you bring everything into focus. Download our free e-book, “The Complete Financial Guide To Operating A Franchise,” for the insight you need to understand the how to wisely invest in a franchise and ensure the best return.