Know the Costs
There are a number of costs associated with acquiring and starting up a franchise.
1. Initial Investment Fees
You will probably need to pay initial fees to your franchisor. The median initial investment cost in 2006 was $25,150, according to the International Franchise Association. About 75 percent of businesses have set initial fees, while 25 percent have ranges for the fees, the association reports.
The National Federation of Businesses says most franchisors expect you to pay one-third of the fees in cash. The rest can be financed through the franchisor or on your own. Franchisors may help you get loans through their financial institutions.
The fee allows you to use the brand name, and often includes training, marketing and other services. The franchisor will determine what exactly the fees cover.
2. Startup Costs
You may still need to buy or lease a property, which is usually the largest cost for franchises, purchase equipment and hire staff. These are traditional startup costs for any small business and can also apply to franchises.
3. Royalty Fees
You'll need to continue paying a percentage of your income to your franchisor for the right to use the brand. This fee can range from 4 percent to 12 percent, Naddaff says, and can also be used by the company to help your store with marketing and promotions or to have corporate site visits.
On its Web guide for buying a franchise, the Federal Trade Commission notes that "even if the franchisor fails to provide promised support services, you still may have to pay royalties for the duration of your franchise agreement." Before buying a franchise, be sure to ask franchise owners about the services and support they've received from their royalty fees.
4. Additional Costs
You'll be responsible for ongoing operating costs such as payroll. You also may have to pay for your own advertising, depending on the services your franchisor bundles into the agreement.
Research the Market
Franchises shouldn't be too young, nor should they be too well-established. If a franchise is either, you may be heading into a risky investment.
"You can be too soon on something or too late," Naddaff warns. "So I try to find things on the cutting edge."
Think American coffeehouses are booming? So do other companies, which is why the market has already been tapped, Naddaff says. He sees more growth in restaurants offering health and ethnic foods.
Find out what's missing in your community and how similar businesses are performing in comparable communities.
