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A franchise can be a great way to start a business but do your due diligence first.
Folks who want to own a business but don’t want to build one from scratch often opt for a franchise. Franchisors have done the legwork of identifying a product or service people are willing to pay for and how to operate the business. For a fee, franchisees can set up business for anything from a doggie day care to a car wash to home repair services. If you’re considering this business model, here’s what you need to know before investing in a franchise.
How much are franchise fees?
Franchise fees are as varied as the businesses they represent. $10,000 is on the low end. $20,000 to $50,000 is the range for the majority of franchises but they can go much higher—even into the millions.
In addition to annual franchise fees, royalty payments of 4% to 12% of revenue may be required. It depends on the contract.
Another thing to know is that some franchisors require a certain amount of liquid capital and net worth in order to become a franchisee.
More than the franchise fee is needed to set up shop
Franchise fees grant privileges to operate under a brand name, but they don’t cover start-up and operational costs.
Typical expenses in setting up a franchise include a lease or real estate purchase and professional fees for an attorney and accountant. Equipment, furniture, signage inventory, marketing, training and business licenses may also be required.
In some cases, franchisors purchase real estate and lease it to franchisees which can substantially decrease start-up costs.
Franchisees may be eligible for an SBA loan to cover working capital, real estate or construction.
Learn as much as possible before putting up money
Franchisors’ websites are a good place to start gathering information, but you want to dig deeper. Do your due diligence.
Franchisors are required by the FTC to provide a Uniform Franchise Offering Circular (UFOC), a disclosure document required by the FTC; get a copy of the UFOC to learn more about the franchise’s history, fees and royalties, officers and executives and any civil, criminal or bankruptcy actions the company or its office and execs have been involved in.
Delve into the details about territories, how long the franchise agreement lasts (often 10 to 20 years) and renewal fees. Thoroughly read the rules and regulations and make sure you understand the responsibilities of the franchisor and franchisee. Depending on the type of business, you may also need to look into licenses and permits, zoning and environmental regulations.
Talk to other franchisees. Those with direct experience with a franchisor can be a valuable source of insight and information.
Know exactly what the franchise agreement means before you sign a contract or put down a deposit. Consultation with an attorney who specializes in franchise law can help you understand the contract. And if necessary, they can help negotiate the terms of the contract.
Business funding from Consumers
At Consumers, we love helping our business members succeed, including franchisees. Turn to us when you need an SBA loan, vehicle or equipment loan or business line of credit.
All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions. Federally Insured by NCUA
Consumers business loans
Do you have business banking questions? Contact our knowledgeable commercial loan officers.