When people think of franchising, fast-food chains like McDonald’s or Taco Bell often come to mind. While these high-profile brands require significant investment and millions to open, they’re just one part of a much larger, diverse franchising world.
In reality, many franchises fall outside the fast-food category and are designed to be more accessible. These options often require less capital and don’t always involve brick-and-mortar locations, making them a practical choice for first-time entrepreneurs.
At FranCoach, we partner with nearly 700 franchise brands, and over half of them don’t require a retail location. These non-brick-and-mortar businesses offer flexibility and affordability, often operating from home or requiring only a small office.
Total Investment
Understanding ‘total investment’ is crucial when evaluating franchise opportunities. It’s a comprehensive measure that includes three critical components.
- The franchise fee, which averages around $50,000, is the upfront cost required to acquire the rights to operate a franchise. This fee is typically paid when you sign the franchise agreement and serves as your entry point into the brand’s system.
- Beyond the franchise fee, you’ll need to account for all costs incurred from signing the agreement to launching the business. These expenses can include securing a location and any necessary build-out, hiring and training staff, purchasing equipment, marketing the grand opening, and even smaller items like branded uniforms. These costs vary depending on the type of franchise but are essential for getting your business operational.
- It’s also crucial to set aside a minimum of three months’ operating capital to cover all expenses during the early stages of your business. This ensures you can manage costs like rent, utilities, payroll, inventory, and other operational needs without financial strain as the business begins generating revenue.
Having a clear understanding of these costs ensures that prospective franchisees can budget effectively and avoid surprises during the startup phase.
What are the ranges of a “total investment”?
Franchise investments vary widely, but they can generally be categorized into three main types.
- Stand-Alone Brick-and-Mortar Franchises: These include fast food restaurants, big box gyms, and similar standalone facilities. Due to their size and infrastructure requirements, these franchises typically require a total investment starting at $1 million or more.
- Strip Mall Brick-and-Mortar Franchises: Strip mall locations encompass a wide range of businesses, including quick-service restaurants (QSR), boutique fitness studios, health and wellness services, beauty brands, and business services. These franchises usually hover around a $500,000 total investment, with QSR concepts often exceeding this range, while non-food franchises can come in below.
- Non-Brick-and-Mortar Franchises: These are often the most affordable options, typically requiring a total investment of less than $250,000. In some cases, investments can go as low as $100,000, though there are relatively few opportunities at this price point. These franchises may include home-based businesses or those requiring only a small office space.
Understanding these categories can help potential franchisees identify opportunities that align with their financial resources and goals.
The internet is not our friend.
Searching online for ‘franchises under $100K’ yields numerous lists, but it’s important to scrutinize how these investments are calculated. Are they talking about “total investment”? And if so, are they talking about the absolute lowest range of a franchise’s total investment?
I saw a list once that included a major food franchise. This was a franchise that is typically in the million dollar plus range. So how was that possible? Well, the site creating the list was basing this solely on a franchise fee and not the “total investment”. To navigate these discrepancies, partnering with a franchise consultant can provide clarity and ensure you’re evaluating opportunities based on accurate information.
Now that you understand not all franchises require millions of dollars, you know the ranges for types of franchises, and clearly see the importance of the “total investment”, how do you know what you can actually afford?
Franchise ownership is similar to buying a house: most people use cash for a down payment and finance the rest through a loan. This approach makes franchise ownership accessible to a wider range of individuals.
An SBA loan is the most common method with which to become a franchise owner (there are several non-SBA loan funding options). These loans operate very similarly to buying a house. You need cash out of pocket, essentially as a down payment, and then the loan covers the rest. The cash to loan amount can vary but generally think 20-30%.
Invest more to make more.
A common misconception is that higher investment guarantees higher returns. While this can sometimes be true, it’s not always the case. For example, a non-brick-and-mortar franchise often has a much higher revenue ceiling than a retail brand because it literally has no ceiling.
A boutique fitness studio can only have so many people in a class at the same time and only so many classes scheduled during the week. Once all those classes are full, the ceiling for that franchise unit has been hit. If owners want more growth, they then open a new studio. Yes, brick and mortar brands can be very profitable, but further growth requires additional studios. This distinction highlights the flexibility and scalability of non-brick-and-mortar franchises.
But what about a cleaning franchise that does not require any retail space? These brands are assigned a territory in which the owners can acquire customers. If an owner’s financial goals can be met by gaining let’s say 1% of the market share in their territory (sometimes it can be done with even less than 1%) but they want to grow even more, what do they do? Well, they could spend the money to launch another territory, or they could just work to grow a larger market share within their current territory.
How to find your best franchise?
While franchise ownership doesn’t require millions of dollars, finding the best fit involves many factors. At FranCoach, our goal is to educate prospective franchisees and help them determine whether franchising is the right path. If it is, we work to match them with the brands that align with their goals and aspirations.
Bio: Tim Parmeter is the Founder and CEO of FranCoach, a premier franchise consulting firm. With over 20 years of experience in business and coaching, Tim specializes in helping individuals explore franchise ownership and find the perfect match for their goals and lifestyle. Through his personalized approach and industry expertise, he has guided countless entrepreneurs toward achieving their dreams of business ownership.