In return for the franchisee's investment, the franchisor is offering a known brand name and business formula that has been proven to work. So, for the capital commitment being asked of the franchisee, they need to ask themselves one simple question - is the investment involved justifiable?
What Major Investments Are Involved?
Franchise fees are determined by the nature and profitability of the business. Most companies have a scale when it comes to franchise fees. Franchise fees for most single units can range anywhere from $5,000 to $80,000, but could be higher for high-end franchise concepts. In addition to this upfront fee, most franchisors also charge an ongoing royalty fee that typically ranges from 3-15% based on revenue, again this could also vary to higher or lower degrees.
Assuming that you are renting (not buying) a location to run the franchise unit, most landlords require a rent advance of up 3 months. This means a tenant will have to put up 3 months worth of rent upfront. In the case of a shopping mall with high traffic, be prepared to be quoted up to 6 (or even 12) months of rent payments in advance. In addition, most landlords will also require a one-time payment of a security deposit, which could also range from the equivalent of 1-3 months worth of rent, but is refundable upon lease expiry.
Equipment & Machines
Due to operational requirements, different types of businesses will need various pieces of equipment and machines. There are generally long-term payments available for most equipment purchases and franchises normally have the advantage of bulk buying from a dedicated supplier.
Again, the mechanics of bulk buying could be in play here. This will usually consist of at least a 2-week capacity, unless you're in a business that requires a much more complicated inventory. Most franchisors will tell you what their opening inventory requirements are, otherwise they will sit down with you and discus what inventory level best suits your particular situation.
Most franchisors will expect you to have sufficient capital to run the business for a minimum period, at least until there is a cash flow, so some franchisors may ask to see evidence of working capital ranging from 3-6 months. In this case, major expenses will encompass employee salaries, inventory purchases, utilities and perhaps rental payments if not already covered when taking up your franchise unit location.
Advertising & Marketing
Most franchisors require their franchisees to pay a certain amount into a national marketing fund used to develop the brand. Usually a proportion of the advertising fees are left to be utilized by the franchisor but tied to some advertising guidelines. The balance is left to the franchisee to develop the franchise unit and grow the business.