Understanding the Cost of Buying a Franchise

Like with any major purchase, determining what you can afford should be Step #1. With over 450 franchises to choose from, you can narrow the playing field based on your financial and lifestyle goals. Knowing how much you realistically have to invest is key to choosing the right business model. Be honest with yourself when putting together your financial worth.

FEES AND UPFRONT COSTS

Based on federal regulations all franchisors must show you all the costs associated with purchasing and operating their business model. These fees and costs are outlined in the Franchise Disclosure Document (FDD). Keep in mind, since this is a regulated federal document every franchise opportunity you review should present you these cost breakdown – if they cannot produce their FDD – RUN! Here are the schedules that give you an itemized breakdown of costs:

  • ITEM 5: Initial Fees: This section covers the upfront cost to purchase a franchise. This fee can be based on a number of factors including territory exclusivity or size, equipment package or building square footage for example. Typically the Initial Fee cannot be financed and may be non-refundable if financing falls through.
  • ITEM 6: Other Fees: This schedule covers Royalty Fees, Renewal Fees, Advertising, Supply Costs and other miscellaneous costs.
  • ITEM 7: Estimated Initial Investment: This is a table that lays out your estimated initial investment along with three months of operating expenses. Follow the link for an example of Sparkle Wash Professional Pressure Washing’s Item 7.

MINIMUM FINACIAL REQUIREMENT

Most Franchisors usually list minimum financial requirements (MFR) on their website. This serves as a threshold for both you and the Franchisor. If you can’t meet the minimum financial requirement, you most likely will not be able to move forward with this offering. Some franchisors might be willing to work with you if you are serious about purchasing one of their franchise units, but if not please don’t waste your time and theirs. The MFR are broken down into two requirements:

  • Liquidity– No matter what type of business you buy, it will take some time to turn a profit – your Franchisor should be able to tell you how long. Franchisors know this and usually require new franchisees to have a minimum amount of liquidity in order to keep the business afloat during its first year or more.
  • Net worth– Franchisors also usually set a minimum level of net worth before they consider someone a true candidate for their brand. This is to assure they have access to working capital during seasonal or market down swings.

For example, a Sparkle Wash Pressure Washing franchise will cost about $96,500 for an exclusive territory. This includes all equipment, startup supplies, grand opening expense/advertising, etc. Sparkle Wash’s minimum financial requirements are $100,000 in net worth and $50,000 in liquid assets. Entry cost could vary based on the size (population) of the territory awarded.

An increasing number of franchisors offer discounts to veterans, minorities and women. Incentives for vets, minorities and women can include lower initial franchise fees and/or reduced royalty payments. For example Sparkle Wash not only offers a $5,000 discount but also offers additional training and support programs for veterans, minorities and women. Check out Sparkle Wash’s Veterans Program here.

Keep in mind that although the entry costs and ongoing expenses of getting into franchising may seem steep, it also costs a lot of money to start your own business. The biggest advantage of choosing a franchised business over starting your own business is that you enter with your eyes wide open regarding startup and future costs. These costs are based on the experience of existing franchisees so franchisors can provide you with a very accurate picture of what it will cost to start the business, your ongoing expenses, and a good approximation of when your revenue stream will turn positive. This is incredibly valuable information you won’t have if you choose to start your own business.

If you would like to learn more about franchising or more about owning a Sparkle Wash Professional Pressure Washing franchise please contact us. I promise there will be no hard sell! We are here to answer your questions.

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