Franchise Fee Vs Initial Investment: Aren’t They the Same?
You want to purchase a franchise business. You’ve found the perfect opportunity, but you’re confused about how much your startup costs will be. Many prospective franchisees are.
The franchisor is going to charge you a franchise fee, as per the franchise agreement. Then you’re told your initial investment will be more. Why? Let’s discuss franchise fee vs initial investment.
What is the initial franchise fee?
When you purchase a franchise business, the franchisor will charge you initial franchise fees. You shouldn’t confuse these with ongoing fees, which include the franchise royalty. The franchise fee is like the fee paid as an initial membership – it’s a one-time fee that gives you the right to use the trade name of the franchise business.
This fee covers things like intellectual property licenses (for example, trademarks and service marks), initial training, brand names, logos, systems, and products. The franchisor also has other costs to cover, such as legal expenses, background checks, professional fees, etc.
What is a franchise initial investment?
Okay, so you’ve bought your club membership. But this doesn’t include extras, like the club tie, jacket, or member-only lunches. Now that you have paid the initial franchise fee, you’ll need to invest to open the business.
You’ll be given an estimate of your total initial investment (which includes the initial franchise fee) in the Franchise Disclosure Document (FDD).
How to calculate the initial investment for a franchise business
The question, then, is how to determine a franchise fee and other initial costs. While this amount will differ between different franchise businesses, the formula of how to calculate franchise fee totals is consistent:
Step #1: Calculate your location costs
In location costs, you’ll need to include items such as:
Step #2: Calculate your business costs
Remember, the costs that you’re calculating are costs to open the business. So, when you calculate franchise opening costs, you don’t include working capital, weekly or monthly royalty fees, or costs associated with initial access to franchise systems.
Here are examples of other business costs that you must take into account:
Opening inventory and supplies
Point of sales and computer needs
Initial operating capital
Step #3: Calculate your total investment to open your business
Now, total the costs you have calculated in both steps to arrive at the total investment you will need to make to open your franchise business. Bingo! You’ve calculated what you should expect to invest to start what is, essentially, a fee-based business.
Not sure where to start? Here’s a fool-proof hack
If there is a single, cover-all tip we can give about your initial investment calculation, it is this: never rely on the FDD to provide a definitive assessment of your initial costs. Apart from detailing the initial franchise fee and ongoing franchise royalty fees, what it provides is guidance on how much you’ll need to invest.
There’s one tactic that the most successful prospective franchisees use to get real-world estimates of total initial investment: ask existing franchisees. You’ll be able to get exact figures from them, and maybe a few ideas about how you can minimize your startup costs, avoiding the franchise mistakes they have made.
Initial success is all about due diligence
What we’re talking about here is due diligence. Make sure that you dot the is and cross the ts, consider all costs, and remain conservative in all your estimates.
This is where partnering with a franchise consultant pays dividends. They’ll help you navigate the route to franchise ownership, ensuring you consider all the costs of owning a franchise, and helping you to connect with franchisees who have been in your position as a prospective franchisee.
An experienced consultant will also help you by discussing the current market, industry, and sector prospects, and drill down to matching you with the franchises that will give you the best chance of outstanding success.
Where do you start?
Either take a franchisee assessment or, if you prefer, book a free consultation to discuss your business goals and franchising objectives.