The total cost depends on the type of franchise. A restaurant may include the cost to build and equip a store. On the other hand, a home-based business will only require the physical equipment needed to provide the service or sell the product. Here is a list of the most common costs:
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Franchise Fee
The initial franchise fee can cost several thousand to several hundred thousand dollars. Other costs include operating licenses and insurance. Some franchisors require franchisees to pay a "grand opening" fee to promote the new location.
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Royalty Payments
Franchisors often charge royalties for the right to use the franchisor's name. These are based on weekly or monthly gross income. Some franchisors require payment, even if the franchisee hasn’t earned much income during that time.
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Advertising Fees
Some franchisors collect advertising fees to help pay for national advertising or to attract new franchisees. This is on top of any advertising franchisees purchase to market their specific location.
The Franchise Disclosure Document, which the Federal Trade Commission requires franchise sellers to provide to perspective buyers at least 10 business days before a contract is signed or money exchanges hands, should contain a complete list of the costs involved to start one of the company's franchises. But there may be other undisclosed costs. The franchise disclosure document should also include a list of all the company’s existing franchisees.
“Talk to as many as possible to ask their stories and what their costs became,” Otte said. “The franchisor should be able to predict the amount of total cash needed to start the business and to that you must add marketing, payroll, rent, product costs and personal living expense. The franchisee should have at least six months of back up capital, but often a year is better.”