How Much Does a Franchise Really Cost?
One of the most important areas of Canadian franchise research is the price tag. It's only natural to want to know how much you can expect to invest and pay out over time in any given business. While there may be some unanticipated expenses down the line, most of your costs should be outlined in the Franchise Disclosure Document (FDD) you receive. The main expenses are your initial investment and the franchise fee, but there are other costs to be aware of, such as computer software and support fees, training fees and ad fund contributions. The FDD must also list any audit or transfer fees, interest charges on late payments, and insurance premiums you may have to pay.
Because this money will be leaving your pocket, it is necessary that you understand as much as possible about what you're going to pay before you sign any agreement. Take a closer look at the common costs below so you're more prepared to make your decision.
Your initial investment
The initial investment is the largest sum you'll pay upfront when getting your franchise. It should be broken down in your FDD in the form of a chart or diagram that allows you to easily understand where the money is headed. There may also be a range for this investment because factors like location type and area will impact the cost. Keep in mind that the figures in the FDD are estimates and usually won't take factors like tax or financing charges into account.
Your investment may include some of the costs already mentioned above, plus one-time payments that are a part of your startup phase, including:
• Initial supplies
• Leasehold improvements
• Décor and furniture
• Utility security and lease deposits
• Equipment, such as computers
• Signs and related items
• Grand opening promotions
In the FDD, you may find an estimate of how much working capital you'll need going forward. This is only an estimate; you should still consider reviewing everything with a financial adviser so you can develop a business plan that will work for you.
Annual operating costs
A franchisor isn't required to give you an estimate of annual operating expenses or working capital, but some will anyway, so it's a figure worth considering. Most franchisors don't supply annual operating costs because they don't want franchisees treating the estimates as actual representation. You can work with an adviser or go over the provided information yourself to create an estimate of how much your franchise will cost each year.
Ad funds and royalties
Royalties are a fixed sum or percentage of your sales that you pay to the franchisor for using the system. These will be spelled out in the FDD, and they're usually an ongoing cost.
Many franchisors have national ad funds to which franchisees are required to contribute a fixed sum or percentage of sales. You may also have to spend a certain amount of money on local advertising, so be prepared for these expenses.
When it comes to franchise cost, always estimate on the high side so you can leave yourself some wiggle room. Your location won't be profitable overnight, so you need to leave yourself a cushion as you grow your new business.