What Is Total Investment In A Franchise?

Franchises are gaining more popularity day by day among those who want to run a business.

It provides a less risky option to own a business and has the option to scale more than a normal business you would create.

There are many reasons why franchises are more beneficial than creating a business, but mostly, it’s easier to handle.

However, a franchise also comes with quite a lot of costs because you need to buy the rights to a brand.

This includes using every single thing of the franchise, from its name and logo to the same equipment, items, and similar training.

All this increases the start-up costs to start a franchise, whichever type of business you are aiming for.

What Is Total Investment In A Franchise

What Is Total Investment In Franchise?

When you decide to start a franchise, you must sign a Franchise Disclosure Agreement (FDD) that discusses every little detail about the relationship between the franchisee and the franchisor.

Most of the items on the agreement are mandated by law and have to follow a certain rule. Item 7 on FDD is mostly the financials focusing on start-up costs.

It first starts with the initial investment that focuses on seven important categories as the most basic points where the franchisor gives an estimate.

The total investment takes these into account and then sums up all the other costs associated with the start-up costs.

Then you get an estimation as to how much you can expect to pay for everything from day one until your franchise becomes operational and profitable.

Read: What Is Initial Investment In Franchise?

Does law mandate total investment?

Does law mandate total investment

Federal and state laws mandate the initial investment part’s starting point. However, the entirety of the total investment might not be mandated by the laws depending on your state.

Generally, the initial investment gives you the highest start-up costs you can expect to pay. Hence, it covers the majority of the start-up costs.

Since the total investment is a sum of all the investments you require to make to open the franchise, it is not entirely mandated by law.

Some of the costs might be applicable, and some might not, so only the core of the total investment is mandated by law.

What Is Included In The Total Investment?

What Is Included In The Total Investment

Total investment estimates all the start-up costs when starting your franchise. At first, item 7 discloses the estimated initial investments in seven categories.

Then the total investments take this into account and sum up by adding other numbers. These numbers generally include these but are not limited to:

  • Fee for the franchise
  • Property rent or buying price
  • Improvements to the property
  • Utility deposits
  • Business and property insurance
  • Office decoration, equipment
  • Training expenses
  • Furniture and fixtures
  • Starting inventory
  • Software – if needed
  • Subscription payments
  • Business licenses and other permits
  • Accounting employees/fees
  • Operating funds

These might be more depending on the type of franchise business. Still, generally, all these are enough to cover the total investment.

Some of these are already calculated in the initial investment part, but the rest will come from new estimations by the franchisor. The total sum of all the cost estimations comes out to these.

Read: What Is A Restriction In A Franchise Business?

How Do You Determine The Total Investment?

How Do You Determine The Total Investment

Determining the numbers on the total investment is not easy because there are many things to consider.

The numbers might mostly come from the previous experiences of the franchisor and takes their costs into account.

However, these numbers might not make sense to another franchisee, depending on your location and size. At this point comes the experience of both sides and ballpark estimations.

You can look at the market, do your research and come up with numbers in a range that you might expect to pay.

However, since there are many varieties included, the estimations might not be the exact number, but they will be close.

The important thing is that since the law mandates the initial investment to be calculated and leaves the rest to the parties of the agreement, you have to follow them yourself.

Is Total Investment Fixed, Or Does It Vary?

Franchises could be in various industries, locations, and types of businesses, which means they need different numbers of investments.

If you are franchising a hotel, the total investment costs of a hotel franchise will not be the same as a fast-food franchise.

That is why the total investment cannot be fixed and will always vary greatly between businesses.

However, when you decide what kind of franchise business you want to operate, you can get similar cost estimations from the same business and size franchises.

If you are going to have a McDonald’s franchise, Burger King or KFC franchises will also have similar numbers for the total investment. They might not vary as much as different industries.

The Verdict

It is no secret that franchises allow a less risky operation of your own business.

Even though you will not determine the name, brand, logo, customer base, or anything else, it will still belong to you.

You will have customers from day one because it is established. But this also comes with costs, which you can consider as total investments.

The total investment considers every penny you spend before opening and operating the franchise.

You determine it by taking estimations from similar businesses or by the franchisor’s experience, and the numbers vary greatly.

Since these are only estimations, they also do not give you the exact amount you will spend, but they have to be as close as possible.

Read: What Is Franchise Fee & Why Is It Charged?

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