Franchise Costs

Franchise Costs - If you want to be a franchisee, you’re basically going into business for yourself. So it’s time to start thinking like a business person. Let’s get to a few terms that the first-time franchisee should know.

There are two levels of costs associated with running a franchise. These are direct costs and indirect costs. Some examples of direct costs:

* Advertising fund - Money the franchisee pays to the franchising company to reimburse them for advertising costs. This may range all over the chart depending on which company and what set-up you have. You may also be responsible for advertising your own location or branch. An advertising fund is more likely to be the case in a 100% franchised business, as opposed to businesses with owner-operated locations.

* Initial investment - Up front cash paid to the franchisor, in exchange for a franchise license. This may be a one-time fee at the beginning or an annual fee. The license officially grants you the right to do business as a representative of that company, and to sell and promote the products or services associated with that company. There may be deposits required as well.

* Exclusive territory - Some franchises charge extra for the guarantee that you have exclusive rights to a geographic area. For instance, you might want to be the only Mom’s Donuts in Boston. Some franchise businesses include this guarantee automatically, while other charge extra for it.

* Registration - This is between you and the government, be it city, state, or nation. The usual business licenses, permits, and other paperwork required to become a legal entity doing business, and the associated fees that go with it.

* Royalty - The action! The percentage of your gross sales that you pay back to the franchisor, being the whole reason for having franchises in the first place.

And some examples of indirect costs:

* Designated suppliers - From whom you will be buying the supplies needed to run the business. This is usually for quality-control purposes, or to meet some obligation put forth in marketing. Designated suppliers might cost more than alternative suppliers, so it counts as an indirect cost. For instance, if your cheeseburger franchise claims in advertising that your cheeseburgers only use 100% whole milk Wisconsin cheese, then you’d be required to only purchase cheese from their approved distributors, and not, say, slink into the corner market to buy Velveeta on the sly.

* Distributorship - Same concept as designated suppliers, except that you’re selling a product directly. For instance, your clothing franchise may be required to stock Levis jeans. Other brands may be sold through your franchise as well, depending on the agreement.

* Start-up costs - Oh, you know, we figured you should probably have a building to sell this stuff out of. Now we’re down to the usual stuff you’d expect from starting any business: procuring the location, purchasing equipment and inventory, hiring staff, and so on. This varies from one kind of business to another; home-based businesses require almost nothing here, while large retail operations will require their own custom-made building! How did you think McDonalds restaurants got the nickname “the golden arches”? That’s right, if you start a McDonalds, you are required to run it out of a custom-designed building.

Don’t be intimidated by the list - some or all or none of these might apply depending on the type of business. The total investment is usually disclosed in the company’s net worth requirements. That might range anywhere from a few thousand dollars to more than a million.