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There are many different costs associated with stating up a franchise and most of these costs can vary from one franchise investmen to another. However, there are some “main fees” you will have to pay no matter what franchise or business you are investing in.

Category 1: Initial Start-Up Costs

The following cost considerations are specific to start up stages:

Deposit Fees: For most franchises this fee is used as an indicator to establish the seriousness of your application. Once you proceed, this fee (on average $5,000 depending on the franchise operation) will be incorporated into the initial franchise fee.

Initial Franchise Fee: This is associated with each franchise unit you open. It is a payment for the right to use the franchisor’s brand and techniques, but it also covers the cost of training and site selection. It can vary on average from $5,000-$50,000 depending on the type of franchise investment.

Initial Working Capital: This covers your initial stock and day-to-day expenses until you break-even within the business. The avearge figure for intial working capital is based on the size and type of the franchise business and is usually estimated by the franchisor (from 2-3 months or 2-3 years working capital) and is incorporated into the total investment cost.

Total Investment Costs: In addition to your initial fee and working capital, you will also have to fit out a premises (if you are locating a business in a specific area; or the business is not home-based a premises may be required). This covers fixtures, fittings, equipment, signage and other different items specified in the Franchise Agreement.

Other start-up costs may include rent (premises), legal fees, consultants fees, payroll, utilities, marketing and advetising fees etc. As a franchisee you must incorporate all fees in your “expected budget” plan for the business so that you do not fall short of payments and have to take money from your monthly revenue and finally to ensure you are prepared for all financial eventualities.

Category 2: Ongoing Costs

Fixed Fee: A fixed fee is mostly applied in job franchises. This fee is a regular monthly or annual fee that must be paid irrespective of the turnover in your franchise unit.

Management Service Fee or Royalty Fee: The management service fee or royalty is a variable charge (subject to changes in interest levels) and is a percentage of turnover net vat (between 4%-6%). You do not need to pay both a fixed and a royalty fee. The franchisor will let you know which fees you will be required to pay, stated in the Franchise Agreement.

Advertising Levy: The fee is charged as a percentage of turnover and is generally incoporated within the royalty fee. The money is pooled in a promotional fund to build the brand through marketing and advertising campaigns and is critical for the success of everyone within the system.

Real Estate Costs: If you are buying into a business that requires real estate/premises, you will be required to pay a large amount of money for the amount of space you need for the business. While most franchisors will help with locating the fitting the right premises for your business, the real estate costs fall on you to pay.

Equipment and Supplies: Generally the franchisor will help you with the supply of equipment for your business, at a considerable discount. However, the payment of equipment and supplies is up to you to pay.

Other on-going costs such as insurance, payroll and utilities will also have to be accounted for by you. You must understand clearly all fees you will be expected to pay as a franchisee before you decide to invest in a business and prior to signing on the dotted line!

If you would like to know more information about the franchise industry, please let me know and I’ll write back to you,

Franchise Reporter