Most new franchisors underestimate how much money they need to franchise their business
Back for Part 2 of the most common question we get when it comes to starting a new franchise system, and, I might add, the most misunderstood concept of franchising at this stage. We have come to realize that the topic of “how much does it cost to franchise my business?” is the root cause of why most franchise systems that launch never get past 10 franchise units.
In Part 1 of “How much does it cost to franchise my business?”, we covered costs #1 through #8 which included the Operations manual, training programs and the importance of an investment into marketing systems (especially your pre-opening marketing system). Today we reveal the answer.
So, just how much does it cost, anyway?
9. Brand Investment: $5k to $40k
This is different from the marketing system that I spoke about in Part 1. Your brand needs to be polished and world-class. You might only have one location, but you better look AND act like you have 500! So many franchisors come to us for our Hartify Method for Franchise Sales, and we often think “but your brand looks like it’s small.”
This investment can take the form of a brand guide, a professional website and all other marketing collateral, from your digital and social ads and imagery to your collateral and trade show banners. This is always an investment that pays off.
(Secret finding: it is quite astonishing how many franchisors launch without a brand guide. Don’t be one of these.)
10. Accounting: $5k
Have you incorporated as a separate entity? Do you have the proper tax structure down? Don’t have a standard chart of accounts? Do you have the right reporting systems in place? These are small, but important “Must Have” systems you will need in place before you franchise. You will also need an Opening balance sheet for your new franchise co-prepared by an outside accountant.
11. Franchise Sales Plan: $25k to $100k
If you build it, will they come?
Nope. They won’t. To attract franchisees and build your business beyond a few locations you must become world-class at franchise sales. And the faster you do this, the faster you will grow and the less likely you will succumb to the fate of 90% of franchisors in North America: getting stuck at under 10 units. Franchise sales will cost money, there is no avoiding it. (Have you ever heard the term “spend money to make money? This is where the rubber hits the road).
We know that the average franchise sale costs around $10k-12k.
Your first few franchise locations (other than the friends and family that jump on board right away) are always the toughest sales to make, so your costs per sale could even be a bit higher for the first while. If you want 5 sales in year 1 then you had better earmark about $60,000 to get there.
Plus, you will need a good CRM (customer relationship management system). If you want to sell 10 franchises in year 1 – which is a target we often advise our clients to shoot for – you will have to generate about 2000 + leads. That is a lot of your time if you don’t have a fully automated process.
You will also need a good franchise website. Both are “Must Have” systems, and both require an investment. That will add another $15k minimum.
By the way, at the Franchise GrowthLab, our Launch clients are starting out at an average of 60-70 (non-portal) leads per month right out of the gate, and with an average sale of about $5k per franchise sold, so that $60k investment turns into more like 12 franchise sales if you do things right. If your franchise fee is $40k, that is $480k in year 1 sales alone. That’s pretty good. That will more than cover ALL of your start-up costs!
12. Year 1 Costs: $60k to $160k
This is the section that almost all founders forget to factor into their start-up projections when they budget how much it will cost to start their franchise. What does year 1 look like? There are so many costs that you just don’t think of, but I will try to cover the major categories. Of course, if you sell some franchises, like our Launch clients usually do, you will get some revenue back. But since 95% of franchise systems that launch does not sell a franchise in their first year of franchising, this is how much you should allocate.
People: Do you need someone to help you launch? A right-hand person? An operations person? A franchise salesperson? You will find that you can launch a few locations by yourself, but at some point, early on, you will need to make a key hire. So, this has to be factored into start-up capital. ($100k)
Travel: Your first franchisees HAVE TO SUCCEED, and you have to do whatever it takes to help them succeed. You will need to visit your franchisees to help them get launched successfully. ($20k if not local)
Franchise Insurance: It is crazy how much insurance has increased since Covid, but you can’t get by without it. ($15k)
Office Rent: Let’s plan on getting by in Year 1 without it. ($0)
Discovery Days: You will need to host franchise prospects to your office and location, and you will want to do it right. This is money well spent. ($5k)
Annual Conference: You will bootstrap your first few annual conferences, but again, this investment is well worth it. ($10k)
Legal: You will have a few ongoing legal costs: ($10k)
- Annual Registration fees for registration states (USA only)
- Most franchisors do significant rewrites of their FDD in year 2 as they realize their documents don’t match their business (see the Legal section)
- In disclosure states and provinces, it is highly recommended to use your lawyer to help you through the disclosure process until you learn it, inside and out
13. Mistakes: $$ Millions
The list is long…very long. Here are most of the mistakes you may make over the course of franchising:
- Franchise Sales don’t grow fast enough (or at all)
- Franchisee break-even is longer than anticipated on average
- Franchisee profit is lower and takes a lot longer than anticipated
- Franchisee start-up costs are higher than you thought
- The combination of increased franchise costs plus longer than anticipated break-even and less overall profitability equals a far too long payback period
- Franchise Sales don’t grow fast enough (or at all)
- Franchisor break-even is longer than anticipated
- Your royalty structure is wrong, so it takes a lot longer to make money and hit that magic mark in franchising: royalty break-even
- Franchisor’s profit is a lot less than you thought. It takes longer than you think.
Can you see how if you had someone to help you navigate or avoid these 8 mistakes, how much less stressful franchising would be and how much money you would save? Not to mention years of your spouse asking you “so where is the money?”.
So, what is the final tally: Just how much money do I need to start my franchise system?
When do we add Part 1 and Part 2 up? It will cost between $160,000 to $625,000 to franchise your business the right way. Listen, I know what you are thinking right now: this much to launch my franchise system. I can do it with less! Of course, you can. I see many franchisors launching with about $20k to invest.
But are your chances of true success high when you don’t think through the true costs to franchise your business? No. Here is why.
Because you will have to skimp on building a team. You won’t be able to hire the right people at the right time with the right skill set. You will continually have to defer making the needed hires. And when you do make them, you will have to hire junior people because that is all you can afford.
You won’t be able to make investments in R+D or continuous improvements to make your franchisees more successful. You will skimp on marketing initiatives, which is one of the most important areas to be investing in when you are under 50 units.
And most of all, you won’t be able to invest in lead generation to find the right qualified franchise partners for your system.
When you do make those investments? Your cost structure will go up, which means you need to sell more franchises. Add to the mix that some of your first franchisees won’t be the right fit (because you will be forced to sell franchises to fund your operations and end up selecting partners who only make it because they have the money, not the right qualities you are seeking). And then the problems ultimately just pile up.
Can you build your franchise system this way? Sure. Do you want to build your franchise system this way? No way. I would not advise it.
At the Franchise GrowthLab, we do not offer a guarantee. Not yet. But I can almost guarantee that we will save a start-up franchisor hundreds of thousands in their first 24 months of operation, and millions of dollars over the course of their franchising. That you can take to the bank.
To learn how to start your new franchise business from one of North America’s franchise experts, learn about The Hartify Method for Starting a New Franchise here.