In terms of capital investment, your franchise fee will be determined by the profitability of the business. Most companies have a scale when it comes to franchise fees. They can have varying ranges, anywhere from $2,000 to $100,000+, depending on the size of the system. In addition to this front-end franchise fee–the one-time charge that a franchisor assesses you for the privilege of using the business concept, attending their training program, and learning the entire business-there will also be an ongoing royalty fee, typically ranging from 2 to 10 percent, or a monthly figure.
Some of the other costs associated with a franchise include:
In some cases, you may also have to buy land or a building, or you may have to rent a building. If you rent a building, you’ll be responsible for not only the monthly lease but for the one-time security deposit as well. In addition, you’ll have to pay for leasehold improvements. In some cases, the owner of the building will put these in and factor them into your rental, probably charging you a small additional fee. The franchisor might provide you with an allowance for leasehold improvements that runs in the neighborhood of $10,000 to $35,000 for your average franchise. Most franchisors will tell you what their estimated leasehold improvements will be.
Different types of businesses will need various pieces of equipment. There are generally long-term payments available for most equipment purchases. Fortunately, most banks will provide loans for equipment because it also serves as collateral.
Outside signage can be very expensive for the small-business owner. Most franchisors have developed a sign package that the franchisee is obligated to purchase.
Opening Inventory -
This will usually consist of at least a two-week supply, unless you’re in a business that requires a much more complicated inventory. Most franchisors will tell you what their opening inventory requirements are.
Working Capital -
For rent, you may be required to deposit first and last months’ payments as well as a security fee. You’ll also have to pay a deposit to the electric, gas and telephone companies (who will want deposits prior to giving you service). You’ll need some working capital and money in the cash drawer to make change. You’ll need money to pay your employees. You’ll need money just to operate until there’s a cash flow. If you’re buying a franchise that relies on charge accounts, you’re going to have to allow yourself some additional capital before the bills are paid by the customers and returned to you.
Advertising Fees -
There is usually a fee for advertising on a regional or national basis. Most larger franchisors require their franchisees to pay a certain amount into a national fund used to advance the concept. The upside is the benefits are quite substantial in terms of the visibility you get with the type of advertising that most franchisors do.
An important protection for the person planning to buy a franchise is the FTC’s Franchise Rule, put into effect October 21, 1979. The rule requires covered franchisors to supply a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to invest. This disclosure must take place at the first personal contact where the subject of buying a franchise is discussed and at least 10 business days prior to signing any contract with the franchisee or accepting any money. This is a “cooling-off’ period intended to prevent franchisees from jumping in without carefully reviewing and considering what they’re doing.
This means a franchisor, franchise broker or anyone else representing franchises for sale has to present a disclosure document-the Franchise Disclosure Document (FDD)-containing extensive information about the franchise. Furthermore, you must be provided with completed contracts covering all material points at least five days prior to the actual date of execution of the documents. Again, this provides another cooling-off period and the chance to have an attorney review the contracts prior to execution.
FRANCHISE LAW CONSIDERATIONS
State Laws -
The FTC doesn’t require franchisors or business opportunity sellers to register with it or any other government agency. However, several states do have registration rules requiring franchise sellers to register. Some of these states laws are tougher than others, but most have adopted the FDD guidelines for their disclosure requirements.
It would be a mistake, however, to assume that simply because a franchise is registered with a state or provides some type of full disclosure document, you as a consumer are going to be protected from the possibility of failure or rip-off. The only thing that a state reviewing agency can do is ensure that the franchisor has responded and filed the necessary documents.
|Franchise Registration States|
|These 15 states require a franchisor to register its FDD and maintain a registration with the state agency indicated. If the company is authorized to sell franchises in one of these states, the company will be registered with the agencies listed here. Two of these 15 states do not require a filing of offering circulars, as noted below.|
|California||Department of Corporations||(916) 445-7205|
|Hawaii||Department of Commerce, Franchise & Securities Division||(808) 586-2722|
|Illinois||Attorney General’s Office, Franchise Division||(217) 782-4465|
|Indiana||Secretary of State Office, Franchise Division||(317) 232-6681|
|Maryland||Attorney General’s Office, Securities Division||(410) 576-6360|
|Michigan (notice req’d)||Attorney General’s Office, Consumer Protection Division, Franchise Section||(517) 373-7117|
|Minnesota||Minnesota Department of Commerce, Franchise Division||(651) 296-6328|
|New York||Department of Law, Franchise & Securities Division||(212) 416-8211|
|North Dakota||Office of the Securities Commissioner, Franchise Division||(701) 328-2910|
|Oregon (filing not req’d)Rhode Island||Division of Securities, Dept. of Insurance and FinanceDivision of Securities, Franchise Office||(503) 378-4387(401) 222-3048|
|South Dakota||Division of Securities, Franchise Office||(605) 773-4013|
|Virginia||State Corporation Commission, Franchise Office||(804) 371-9276|
|Washington||Department of Financial Institutions, Securities Division||(360) 902-8760|
|Wisconsin||Wisconsin Securities Commission, Franchise Office|
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