Let me break down the 5 different types of franchise business costs you will encounter.  To gain a better understanding of how the franchise costs work, I will try to explain each one.

1. Initial Franchise Fee

Nearly every franchise has it’s own initial franchise fee or application fee they sometimes call it. I have seen prices range from a small $500 fee to well over $50,000.  As an example, a subway franchise fee is $15,000 , a McDonald’s franchise fee is $45,000 and a Pizza Hut Franchise is about $25,000.  Generally, most popular franchises fall into the $10,000 to $50,000 range.  There are some of the smaller, and home based franchises that are far cheaper, such as a Jazzercise fitness franchise business that has cost of $1,000 or less.

What the franchise fee covers is the application and review process, initial training and management and franchise support for new owners.  You are also paying for the rights to operate under the franchise business name as well.

2. Setup/Build Costs

The setup and build costs of a franchise are for setting up the unique location, kiosk, building, etc. They may also include the capital required to set up a shop front and purchase the required office and business machines needed to run the franchise you purchase. You will need to figure this into your franchise cost analysis.

3. Legal Fees

Franchise Businesses have detailed contracts and procedure manuals that are often too complex for the average business owner to understand completely.  You need to budget for a competent franchise consultant or franchise lawyer to help review the legal paperwork required for the purchase of the business.  Having a franchise consultant available to you and help coordinate the paperwork review process would be an asset.

4. Franchise Royalty Fees

The franchise royalty fees can often be negotiated with the franchisor.  This fee is also one that people tend to ignore or not consider when budgeting for the business.  The franchise royalty fees are there for a reason, they provide the parent company with capital for advertising, marketing programs, support, on going training and franchise management.  The franchise royalties are your payments to use the business systems and national or international advertising campaigns, etc.  I have not see a single franchise yet that does not have some form of royalty fees.  They can range from a set amount to a percentage of profit and/or a percentage of total revenue.  Each franchise business usually has their own royalty fee structure.  Again, this is a fee that can be negotiated and having a franchise lawyer on your side ahead of time may save you a lot of money in the long run.

5. Running Business Capital

The last and probably the most important franchise cost is running capital. This not only applies to a franchise business, but applies to any business.  You must have a capital fund and liquid assets to maintain the business and run it.  From paying employees, buying inventory and paying lease and utilities, etc.  Each business is unique in it’s operating capital requirements and also vary greatly within the franchise network on where and how large your business is.

Buying into a franchise business may cost you more up front with all the fees you encounter, but you are buying into a system that may or may not have a proven track record.  You are paying a premium for that business experience up front.  This should not scare you away from buying a franchise, but should help you understand where the costs come in and what you are getting into.