If you have been running a successful business for a while now, then you must have thought about franchising it once. And if you are curious to find out “How much does it cost to franchise your business?” then you have landed on the right page.
Franchising a business involves a lot of steps, from coming up with a plan to completing legal formalities to advertising it. The process looks like assembling the pieces of a puzzle.
But do not worry! In this guide, we have broken down every expense that you would need to bear when franchising your business. So, let’s begin!
Cost Breakdown To Franchise Your Business
The cost to franchise your business could vary greatly, depending on which industry you are in, your location, the level of support you require, and the team that you are working with.
There are plenty of costs to consider when calculating the cost of franchising your business. Let us have a look at them one by one:
1. Feasibility Study – $5,000- $7,500
A feasibility study is done before you franchise your business to determine the amount of competition you would have to face and to determine the probability of success of your franchise business. A feasibility study will help you evaluate your business against these key benchmarks:
- Franchise ROI Potential
- Market Share Availability
- Scalability
- Capital Availability
- The Owner/Ownership Group
2. Franchise Disclosure Document (FDD) – $15,000 to $45,000
An FDD is a legal document that contains the underpinnings of your franchise system. This document includes all the legal documents and agreements, payment terms and fee structure, franchise agreement, and more.
The FDD also requires you to add information such as the development structures Item 19 financial performance representations, among other things.
Your company’s FDD must be made by an experienced franchise lawyer, and the cost for the same lies between $15,000 – $45,000.
3. Forming a New Legal Entity – $500 to $7,500
Franchisors usually create a brand new legal entity for their business (usually an LLC or corporation).
This is an important step as it would protect your assets and would keep your audit costs low. The cost of setting this up would depend upon the number of owners of the business, your state, etc.
You can get this done by your lawyer, and it would cost you $500 to $7,500.
4. Federal Trademarks – $1,500 to $3,500
As a franchisor, one of the most important things will be to grant a license to the franchisee to use your intellectual property. In simple terms, this would allow the franchisee to use your brand name and logo legally.
Intellectual property is one of the most valuable assets, and you should make sure that it is protected.
If you do not have a federal trademark already, then you must apply for the same before starting your franchise business.
You would want to get a minimum of two trademarks, one for your business name & other for the logo. You can get this done by an IP lawyer, which would cost you between $1,500 and $3,500.
5. Operations Manual – $0 to $30,000
The Operations Manual is a confidential guide that contains the day-to-day activities that the franchisees must follow to operate the business smoothly. This guide contains everything, right from consumer interaction to legal compliance.
Many times, beginner franchisors get their operations manual developed by franchise experts, and those with some experience prepare the operations manual themselves.
Depending on how you decide to get this done, this step can cost you anywhere between $0 to $30,000.
6. Financial Statement Preparation – $2,500 to $5,000
As a part of your franchise business development process, you will be establishing a new corporate entity or LLC.
There are some states that allow new franchisors to use unaudited financial statements for a year. However, California, Minnesota, New York, and Virginia do not accept unaudited financial statements.
So, even if your corporate entity is new or has little to no activity, you are required to get your financial statements audited.
For this, you will need to pay a licensed CPA so that they can audit and certify the financial statements of your company. The cost for this lies between $2,500 – $5,000.
7. Filing and Registration Fees – $1,000 to $4,500
To franchise your business, you will encounter several filing and registration fees, such as:
- Incorporation fee: Ideally, $300, depending on the state.
- USPTO filing fees:Â Ideally, $250 per trademark per class.
- FDD registration fees: $250 to $750 per state.
8. Training Program and Materials – $10,000 To $25,000
This is quite similar to the operations manual. The training manual contains instructions on what materials the franchisee would be using to ensure consistency. This includes:
- Initial outline of business processes
- Review of existing materials
- Drafting of owner, operator, and franchise-specific training sections
- Review, revisions, and approval
9. Marketing Materials – $25,000 To $40,000
In order to find individuals who are willing to take up your franchise, you will need to spend money on marketing.
Franchise Marketing expense includes the cost of building a website, digital brochures, interactive presentations, tradeshow booth, etc. On the low end, all this could cost you between $25,000 – $40,000
10. Franchise Sales Brokers – $2,000 to $50,000
Finding the first few franchisees is the most difficult, and as such, you might want to hire a franchise sales broker.
These brokers usually charge a percentage (50% to 60%) on the initial franchise fees, and some also take an upfront amount ranging from $2,000 to $50,000.
11. Franchise Management Software – $49 – $79 Per Month
Sooner or later, you will need one of the franchise billing software, Franchise Analytics Software, franchise accounting software to manage your franchise business operations smoothly.
There are many types of franchise management software available in the market, and the cost for the same could vary between $49 -$79 a month or $588 – $948 a year, depending on what features you choose, the size of the franchise business, etc.
12. Marketing & Advertisement – $30,000-$200,000
In order to bring in franchise leads, you will need to market your business. Based on the kind of marketing strategy you choose, the cost would vary.
You can choose to do social media marketing, digital marketing stratergies, traditional marketing, etc., to advertise yourself.
How Much Does It Cost To Franchise Your Business?
| Type of Expense | Cost | Average Cost |
|---|---|---|
| Feasibility Study | $5,000 to $7,500 | $6,250 |
| Franchise Disclosure Document (FDD) | $15,000 to $45,000 | $30,000 |
| Forming a New Legal Entity | $500 to $7,500 | $4,000 |
| Federal Trademarks | $1,500 to $3,500 | $2,500 |
| Operations Manual | $0 to $30,000 | $15,000 |
| Financial Statement Preparation | $2,500 to $5,000 | $3,750 |
| Filing and Registration Fees | $1,000 to $4,500 | $2,750 |
| Training Program and Materials | $10,000 to $25,000 | $17,500 |
| Marketing Materials | $25,000 to $40,000 | $32,500 |
| Franchise Sales Brokers | $2,000 to $50,000 | $26,000 |
| Franchise Management Software | $588 to $948 | $768 |
| Marketing & Advertisement | $30,000 to $200,000 | $115,000 |
| Grand Total | $93,088 to 418,948 | $256,018 |
So, finally, how much does it cost to franchise your business? As you can see from the table above, it can cost anywhere between $93,088 and $418,948 to franchise your business on average. The cost of the same could be more or less than this depending upon many factors such as the location, franchise industry, etc.
Cost Of Franchise Sales For First Year
Although this is not technically the cost to franchise your business, every new franchisor must still consider a budget for franchise sales. By increasing your franchise sales, you can scale your business, but this takes time.
In the initial year, however, your franchise sales strategy should include developing a website and website copy, presentations, and PR and building broker relationships, among other things.
For the first initial year, your franchise sales strategy would cost you between $22,500 to $75,500. These estimates would vary depending on the number of franchises you plan to sell.
Let us assume that you are in a franchise industry that is not over-saturated and have a goal of 5 new franchise sales. So, for the initial 12 months, your franchise sales estimated expenses would look like this:
| Franchise Sales Costs | Estimated Amount |
|---|---|
| Franchise Sales Website | $2,500 to $15,000 |
| Franchise Sales Presentations | $0 to $3,000 |
| Franchise Brand Positioning | $0 to $2,500 |
| Public Relations and Brand Validation | $15,000 to $25,000 |
| Franchise Broker Organizations and Attending Conferences | $5,000 to $10,000 |
| Advertising | Estimated Cost $0 to $20,000. |
Ways To Finance The Cost Of Starting a Franchise
We understand that the cost of starting a franchise is not small, and to make your dream come true, you might require some external help with finances. Here’s how you can finance your franchise:
- Ask a family member or a friend: You can ask your friends or family members to help and support you with finances in your endeavor.
- Consult Small Business Association (SBA): You can take an SBA loan if the above option is not feasible for you. The best part about SBA loans is that since they guarantee a portion of repayment, the terms and interest rates are quite favorable as compared to commercial loans.
- Commercial loan: The interest rate in a commercial loan can vary based on the credit history. This is not the best option, but taking a commercial loan can help fund your dream.
Wrap Up
Franchising a business is no cakewalk. There are plenty of expenses to take into account and plenty of things, such as registration, FDD formation, hiring a lawyer, etc., involved in the process.
However, if you have a successful business with a proven model, then franchising your business might be very good for you and would allow you to scale up your business and profits.
We hope to use this guide on How Much Does It Cost To Franchise Your Business? You were able to get an idea of the expense that you’d have to bear to make this dream into reality.
FAQs
How profitable is franchising your business?
It can be quite profitable to franchise your business, but the profit potential depends on the number of franchisees you have, your business industry, your level of competition, etc. On average, you can expect to earn 4-12 percent of your gross revenue.
Is it open to open a franchise with no money?
Franchising your business requires at least some amount of investment. Opening a franchise with no money is highly unlikely as there are non-negotiable costs that you would have to pay for, such as getting an FDD developed, registering your business, fees, etc.
Can anyone franchise their business?
If you have a successful and proven business model that you think can scale up, then you can definitely consider franchising it by considering all the steps mentioned in the article above.