Entrepreneurism is on the rise. With the COVID-19 pandemic pushing many to work remotely, people are finding they prefer working outside of an office environment. Some companies are downsizing, while others are insisting their staff come back to the office now that building occupation restrictions have been lifted.
The result is more and more people are deciding to take the leap and open their own business, and one of the best ways to do so for a beginner is opening a franchise. However, as a franchise coach, I advise those looking to become franchisees to do their homework before signing. A big part of that research is finding a franchise that fits their price range.
There are several factors that determine the cost of a franchise and the net worth of a potential franchisee. A franchise may look like a great business idea, and might be one, but more than one interested buyer has taken a look at the initial expenses of opening a given franchise and come down with a case of sticker shock. Various factors go into a franchise’s initial business costs, such as buying or constructing a new building, getting supplies and equipment, and paying rent on a property. Prospects should make sure to check Item 7 on a company’s franchise disclosure document (FDD) to find out the total estimated initial investment. If that item has an investment range, it’s best to presume the cost will be at the higher end.
The starting cost is only part of the expenses to consider. Before the purchase is made, franchisees should consider the operational cash flow requirement. This is the amount of money a franchise location needs until it starts to turn a profit. Most franchises need time to build up their customer base and business activity, so it’s important to have the money to tide them over and pay for recurring expenses, like employee wages, license renewals, restocking supplies and/or merchandise.
In addition to business costs, potential franchisees should also factor in their own needs and expenses. How much money the owner will make is a big part of why that person invests in a franchise. If the franchise isn’t going to pay for the owner’s expenses, then it’s not going to suffice. Finally, financing options are important. Since most people don’t have franchise startup funds in their back pocket, many need some form of financing. Fortunately, the same financing sources that were available prior to the COVID-19 pandemic are still available. A franchisee should investigate what financing options are available, including asking franchisors if they offer financing assistance.
Knowing where to look for franchise opportunities is also important. Visiting a local outlet and speaking to the manager may help franchise-seekers get in touch with the outlet’s franchisor. Franchise handbooks can be found online or at libraries. Entrepreneurs who prefer meeting company representatives in person can attend franchising expos and conventions to meet franchisors seeking new members. Some prospects may need a bit more direct assistance. For them, enlisting the services of a franchise broker may be the best option.
Having genuine enthusiasm and interest in the products and/or services a franchise provides is an important ingredient in helping determine the best choice. An industry may have several different kinds of franchises in them with differing initial investment amounts. For example, the cleaning industry encompasses different types of residential cleaning, commercial cleaning, and exterior and interior cleaning. A residential window washing franchise is likely to be cheaper than a commercial full-building cleaning service, so there’s a good chance of finding a franchise to fit a given budget in any industry.
As circumstances change, so can the costs and popularity of businesses. For example, with the COVID-19 pandemic, many dine-in restaurants have had a very hard time staying in business. Meanwhile, quick-service restaurants (QSRs) that have take-out or drive-thru service have not only survived, but some have grown. This means franchises that were once highly profitable now may take longer to start turning a profit, while others may experience a boom that sees remarkable growth. Franchise prospects should consider market trends to have a good idea of which franchises have the best chance of making back their starting costs and covering their regular expenses.
Using market research, here are some various types of franchises and their average initial costs:
- Up to $24,999 – Cruise/vacation planners, fitness training, commercial interior cleaning.
- $25,000 – $49,999 – College planning and application advisor, grill cleaning, estate liquidator, home inspection.
- $50,000 – $74,999 – Window covering, disinfection service, pet sitting/dog walking, wood refinishing, senior relocation service, carpet/upholstery cleaning, lawn care.
- $75,000 – $99,999 – restaurant staffing agency, certified lab testing, swimming instruction, building screen service.
- $100,000 – $249,999 – Home medical care, boutique fitness studio, body waxing service.
There are franchises to fit many different budgets in many different industries. The smart entrepreneur should carefully consider their financial means and needs, as well as the potential income and costs of each franchise they look at, both the starting costs and ongoing ones. Weighing the options and making an informed choice will help pair the right franchisor with the right franchisee.
Rick Bisio is one of the country’s most respected franchise coaches and author of the Amazon best seller, The Educated Franchise – 3rd Edition. Since becoming A Franchise Coach in 2002, Bisio has assisted thousands of aspiring entrepreneurs nationwide helping them explore the dream of business ownership.