Before you invest in and sign a franchise agreement make sure you understand what your total costs will be. I see too many new franchises get in over their head when they do not analyze all the costs. You have to keep in mind that markets are different. Just because a certain franchisee is doing well in Phoenix does not mean you will do well with the same franchise in Austin. For example rental rates in the Phoenix market could be much lower than Austin retail space rents, which allows them to enjoy a lower cost of doing business and higher margins.
Initial Franchise Investment
You initial investment in a franchise includes not only the franchise fee, marketing costs, licensing, attorney fees, but also operating costs (e.g. salaries, training, uniforms, utilities, etc) for the first 12 months AND your commercial real estate costs. In most cases you will have to rent office, retail, or warehouse space. Below is a summary of commercial real estate costs to consider:
- Security deposit and first months rent
- Build-out costs for your retail store or office
- Insurance for commercial space (property and general liability)
- Building maintenance and repairs
Franchises can cost a little or a lot as it depends on the segment you choose and franchise brand. Costs can range from $10,000 to $5 million, however the majority of them range from $50k to $200k.
When starting any business you do not want to go into it undercapitalized. Whatever initial investment range the Franchisor gives you aim for the upper end of that range.
Get Personal Finances in Order
You also need to be realistic about your personal financial situation and ensure that you have enough money to cover your personal expenses while you invest in and grow your franchise. This means that you won’t be taking a salary from the new business for at least a year or until it’s profitable.
Franchise Commercial Real Estate Costs
Commercial real estate rental costs are often under budgeted for. Again just because a franchisee in Phoenix is getting a retail space base rate of $14 sf does not mean you will be able to get that in Austin, Tx where retail rents average $30 to $45 sf gross. Commercial real estate rental rates vary from market to market. You still want to find a good retail space near where people live, shop, work, and/or go to school however make sure you can afford the total costs before signing a lease.
Consider SBA Loan to Start Franchise
Many small business owners should consider taking loans to fund a new business venture. You take out a small business loan and lose money initially however as you scale your business and are profitable you will have an asset that will continue to produce income. Then later on you can sell it at a good valuation.
Many franchisees use Small Business Administration funding borrowing 30% to 70% with 10-15 year loan terms, however end up paying them off sooner. SBA loans are issued by a lender however partially guaranteed by the U.S. government. Government backed loans provide reasonable terms for borrowers and decrease the risk for lenders. The SBA loan process can be long and frustrating however many franchises have great relationships with lenders and this makes the process much easier for franchisees.