We understand that starting your own business is a large undertaking that involves careful financial planning. The franchise startup costs vary from company to company, but many of the requirements are similar. Here is a breakdown of the costs you should expect to incur.
The Franchise Fee
No matter which franchise you invest in, there will be a franchise fee. Think of it as the cost of entry. These fees range from several thousand dollars to $100,000 or more. This fee is usually paid at the time of signing a franchise agreement. It is generally refundable up until the franchisee receives any training or learns any of the franchisor’s trade secrets.
Unless you are buying a home-based franchise or an existing franchise location, there will be build-out costs. Your franchisor will likely provide an estimate of your overall build-out costs. This will include all furniture, fixtures, equipment, and signage. Variables will involve the location of your franchise, and whether you decide to lease or buy your own real estate, and the contractor, engineering, and architectural fees.
Opening Inventory and Supplies
Your franchise startup costs will also need to cover raw materials, paper supplies, cleaning supplies, and everything you will need to prepare your products or services.
You will need property and casualty insurance coverage as well as worker’s compensation. If your business involves vehicles, you will need to include auto insurance. Plan on your insurance broker asking for all or part of your first year’s premium as a deposit; in advance.
Even before you purchase a franchise, you should consult with an attorney. They will help you review the Franchise Disclosure Document (FDD) and the franchise agreement. As with most legal counsel, the amount of time you spend with your attorney will determine the overall cost.
You will also need to hire an accountant to help you set up your books and records and keep track of expenses.
Training and Pre-Opening Labor
Weeks before the first customer walks through the door, you’ll need to hire and train managers and staff. You will need to pay these employees for their time.
You will also need to have working capital on hand as part of your franchise startup costs. Working capital is used to pay short-term obligations such as accounts payable and buying inventory. It is considered the amount of cash a business can safely spend. If your working capital dips too low, you risk running out of cash, which can put your business at risk. The amount of working capital you will need is usually determined by calculating current assets minus current liabilities.
Franchise Disclosure Document (FDD)
To make sure you have a full understanding of the startup costs involved, franchisors will provide you with a Franchise Disclosure Document (FDD). This information is revealed in Item 7. Item 7 not only specifies the amount of money to be paid but also explains when it’s payable, the payment method, and whether or not the money is refundable.Franchisors like American Family Care provide you with a franchise consultant to work with you from the start of your franchise purchase process and beyond. This avoids any surprises and provides transparency.
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