Funding a franchise requires a clear understanding of both initial startup costs and ongoing expenses. It's essential to explore diverse financing options, from traditional bank loans to alternative lending sources, to successfully launch and sustain a franchise. Partnering with strategic solutions like CAVU HCM can further streamline operational costs for franchisees or improve a franchisor’s ability to attract new franchisees to advance business growth.
In this article, we’ll explore how to calculate franchise startup costs, how franchises can be successfully financed, and how to lessen operational costs and increase efficiency once your new franchise is up and running.
How to Calculate Franchise Startup Costs
Franchise startup costs can differ significantly based on a number of factors, including the franchise’s industry, location, brand, facility requirements and workforce size. Recent data suggests that the average franchise startup cost is around $150,000, though some franchises can be started for $10,000 or less in certain industries. In other cases, franchise establishment could represent a multi-million-dollar investment if the franchise is associated with a particular brand or requires a large real estate investment.
According to the Federal Trade Commission (FTC), a franchisor is required to supply any potential franchisee with a franchise disclosure document (FDD) that includes an estimate of funds required for initial purchase and working capital necessary for operations following establishment. Any FDD should also detail the due date, preferred payment method and refund status related to each listed expense.
While communicating directly with the franchisor is an excellent starting point for determining costs, it’s also wise to reach out to existing/current franchisees to gather more detailed information about regular operating expenses. This is especially useful if you can gather information from a franchisee in a comparable location, and using a comparable or proportional facility, workforce, etc. Ideally, another franchisee will be able to provide insights that support responsible decision-making and budgeting for your upcoming venture.
Franchisors require a franchise licensing fee, which grants franchisees official access to the company brand, business systems, and the legal right to operate under that brand for an established timeframe. In general, a franchise fee falls somewhere between $25,000-$50,000, though this can vary based on industry, and a franchisor may request a larger or lesser amount based on the expected costs of initial expenses covered by the franchisor. Sometimes, franchisors offer incentives (discounts or franchise fee extensions) if a franchisee applies to open a franchise in a new market or geographic location, or to encourage franchise establishment by women, veterans or minority owners.
What Are the Most Common Franchise Startup Costs?
Although franchise startup costs can vary greatly based on industry and other factors, here are some typical expenses to anticipate:
- Working Capital – Most franchises take time to begin turning a profit, so it’s essential to ensure that the franchise has enough working capital to cover operating costs in the early months after establishment.
- Real Estate & Renovation Costs – Depending on the nature and condition of any property you acquire, you may need to manage mortgage down payments, security deposits, commissions, professional support, as well as costs for any renovations or additions you plan to make to the property or properties.
- Equipment and On-Site Expenses – Whether it’s preparing point of sale (POS) devices, physical office supplies or purchasing furniture and lighting, it’s important to calculate these on-site expenses. This also includes advertising-related costs like signage.
Best Financing and Investment Strategies to Cover Franchise Startup Costs
Many new franchisees rely on financing or outside investment to cover franchise startup costs. Let’s explore the range of options that are available to support your potential franchise.
Apply for a Loan
Franchisees can utilize a wide range of loan types to assist with franchise startup costs, including commercial bank loans, Small Business Administration (SBA)-backed loans, personal loans, equipment loans, and more.
For franchisees with excellent personal credit history, a commercial bank loan is a viable option, particularly because rates and terms are determined based on this credit record. In some cases, a business plan must be submitted in conjunction with consent to a credit inquiry. Many of the same considerations apply if you choose to apply for a personal loan to support your startup costs.
Loans backed by the Small Business Administration (SBA) can also support your new franchise, especially since the SBA collaborates with a wide network of banks/partners (which serve as an intermediary lender) and can help you locate the best loan for your given situation. Typically, the loan terms and interest rates of an SBA-backed loan are better than what is offered through a commercial loan or personal loan.
Depending on your franchise’s industry, you may also be eligible for a more specialized equipment loan. This is a useful option for businesses that need to acquire expensive physical equipment that is essential to operations (trucks for a moving company, or brewing tanks for a craft brewery, for instance). Equipment loans are usually easier to acquire because the loan is tied to a physical asset that can be repossessed in the event of long-term nonpayment.
Some franchisors form partnerships with lenders to support new franchisees. Typically, these lenders will offer more appealing rates, terms, and approval conditions to franchisees when the financing is associated with the franchisor. These funds can support everything from franchise licensing costs to equipment, advertising, and other expenses.
Work with Investors or Partners
Finding a reliable partner to share financial, legal and operational responsibilities can lessen the risk of starting a new franchise and allow each partner to contribute their specialized skill sets to support business growth.
Soliciting support from one or more investors can also be a mutually beneficial practice, allowing investors to financially benefit from a proven business model while providing needed startup support to get your business off the ground quickly. Although working with investors lessens your profits in the long-term, it can be a viable option for franchisees who lack some or all of the startup (and working) capital required to fulfill franchise fees and other major costs in the early stages of business establishment.
Long-Term Franchise Support from CAVU HCM
CAVU HCM offers specialized support to franchisees that want to simplify payroll and workforce management from Day One of their business launch. Whether it’s helping with payroll processing, streamlining onboarding/training for new employees, simplifying workers’ compensation insurance, or offering an intuitive time & attendance system, we’re here to support your new franchise as you move from covering startup costs to managing daily operations.
Ready to start your new franchise with payroll, HR, and compliance peace of mind? Learn more about the tools and expert support we provide to facilitate a stress-free launch and sustained business growth.