The costs of starting an independent business and perfecting the business model will almost always eclipse the costs of starting a franchised business.
Franchising has two costs associated with it; the upfront franchise fee and on-going royalty. Let’s break these down and look at the two individually:
The upfront franchise fee is essentially the setup costs that you pay to join a franchise. This fee covers the acquisition of the business model, your license to operate under the brand of the franchisor, full training to get you up and running, some of the initial business setup costs and it usually includes a sales and marketing package to help you get your first few customers through the door.
What the franchise fee doesn’t include is the capital equipment, furnishings, fixtures or the cost of setting up an office. These costs are associated with setting up any business, whether it be franchised or not.
It’s important to remember that most start-up businesses will spend more than the initial franchise fees in setting up the business and trying to figure out the business model before they run out of cash. The advantages of having a franchise business are huge, because the franchisor has already figured out the business model, allowing you to focus on bringing it to life. This can be particularly useful if you are exploring franchise ownership as a second career.
The second cost associated with franchising is the on-going royalty. This fee, which is usually a percentage of sales, covers on-going support, regular training and conferences, access to large buying groups and vendor level discounts, access to national marketing funds, continuous improvement to the business model and much more.
The on-going royalty usually ranges between 4-30% of gross sales and tends to pay for itself through the savings realised when the franchisee purchases products and services at bulk discount, usually at national account rates.
Additionally, most franchisees will experience much higher sales simply because they are operating under an ‘established’ brand within their industry that customers can associate with due to the franchisors well designed branding, sales and marketing strategies.