If your business is operating successfully and you’re ready to expand, franchising can offer the perfect system to do so. It allows you to recruit franchisees who will handle many of the costs of establishing individual locations, while you focus on developing the overarching franchise system to ensure consistency throughout. Budget carefully for your franchise operations to make sure you’re prepared for this project.
Setting up a new franchise system comes with many initial expenses for the franchisor. Over the first year establishing your franchise system, you’ll incur the following expenses:
$3,500 to $7,500 for a Feasibility Study to evaluate your competition and the probability of success.
$20,000 to $35,000 for the Franchise Disclosure Document and Franchise License Agreement.
Up to $15,000 to prepare a Franchise marketing plan.
Up to $10,000 preparing your Franchise Disclosure Document.
$15,000 to $120,000 to attract new franchise buyers.
$25,000 to $70,000 to establish training materials and provide franchise sales training to equip new franchisees to clone your business.
Altogether, this can total more than a quarter of a million dollars to establish a new franchise. This is not an exhaustive list of the expenses that you might incur, either. You may also need to pay state fees associated with franchise registrations, develop marketing materials to promote your new business, and establish federally registered trademarks, if you haven’t already done so.
Establishing Your Franchise Infrastructure
Once you’ve launched your franchise system, you’ll need to establish the proper infrastructure for scaling. After all, the purpose of your franchise is business growth. You might opt for a slower growth pattern of three to five franchisees a year or take an aggressive approach that pushes to get your new franchise across the region in record time.
Costs at this stage will vary depending on the rate of growth. However, you should budget for a minimum of $25,000 to scale your franchise over the first three years. Increase this if you want to push faster growth.
After establishing your franchise, you’ll be responsible for a number of ongoing fees that are necessary to keep the business going. You’ll have annual renewal fees for your franchise registration that can be as much as 100 percent of the initial filing fee, depending on your state. If you make a change to your franchise system during the year, you will be responsible for filing an amendment, which typically requires a fee of $50 to $250. It’s best to work with an attorney for these filings, but that will increase your total expenses.
Ongoing Operational Costs
While establishing a new franchise is the most expensive part of business operations, you can’t overlook the ongoing expenses that you will incur to maintain a successful franchise system. As the franchise grows, you may need to employ district managers who know how to manage franchise owners successfully within their regions. Your growing business will also need professionals who can handle royalty management, marketing, and other ongoing tasks that keep the franchise successful.
Budgeting properly will help you ensure that your franchise system is a success. With the right systems in place, you can scale your business for franchise success. Despite the initial and ongoing costs, franchising your business can prove to be quite profitable.
Image via Flickr by 401(K) 2013