Cost to Franchise

How much does it cost to franchise a business? We will explain.

How much will it cost to franchise my business?

Answering the question of “how much does it cost to franchise a business” is actually more complex than many people may think, and unfortunately more complex than many will tell you! Yes, you can plunk down $25k – $30k with a law firm and write your FDD and franchise agreement which technically makes you a franchise but most of the time this alone is just throwing your money away, unless of course all you want are bragging rights of saying you are a franchise. The real answer is much more involved and drastically depends on where you currently are and where you want to be in what amount of time. Let’s look at the various components to successfully franchise your business and achieving your desired results with the endeavor.

The Legal Aspects

1. Franchise Disclosure Document and Franchise Agreement
All franchisors must have a franchise disclosure document, AKA the FDD which is the primary legal document detailing your franchise opportunity in a clear, ethical and legal manner. The franchise agreement is also included in this. An unknown secret to the FDD is while yes it is purely a legal document, how they read is somewhat of an art form. Any franchise attorney can write an FDD but the good ones know how to write one without turning off or scaring off your potential franchisees. Commonly the lawyer and the franchise development team will go back and forth on the wording of various items within the FDD. The cost for the FDD can range from $15,000 – $40,000.

2. State Registration Fees
In the franchise world there are 14 US states that require extra steps and registration fees to offer a franchise in their state. It is not mandatory that you register in these states and can always hold off until you are ready but to do business in any of these states you must be registered.

These states are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, South Dakota, Rhode Island, Virginia, Washington and Wisconsin. Those registration costs for each state will vary ranging from $250 to $750 per state and of course add $3,000 – $10,000 to your legal bill. Here are the registration fees for each of these states.

3. Your Legal Entity
OK, sometimes the LLC that owns your current business may suffice as your legal entity going forward but most will strongly advise that you form a brand new corporation or LLC that is the franchisor keeping it completely separate from the corp or LLC that owns your current business or locations. The advantages to this generally far outweigh the costs. This can typically be done for $1,000 – $5,000 depending on your state and how expensive your lawyer is.

4. Trademarking
One of the most valuable components of a franchise is its brand so if it is not done so already, you will want to have your federal trademarks buttoned up tight and well protected. Remember one of the things franchisees will be paying you for is the right to use that trademark. This same will apply for any intellectual property or patents that may be part of the business. The cost for this will range from $2,000 – $4,000 paid to your lawyer and the US Patent and Trademark office for filing fees.

Accounting

5. Audited Financial Statement
While franchisors in their very first year are given a little bit of leeway a requirement for your FDD is an audited financial statement. This money is paid to your accountant or auditor and will generally cost $2,000 – $3,000.

Operations and Training

6. Operations Manual
The operations manual, often called an opps manual can be handled by a range of services. Technically your law firm can write one for you or you can write one yourself but this document needs to be very good if you want your franchisees to succeed and you do. There are groups that specialize in operations manuals which is usually the path we suggest. A well done outsourced operations manual will generally cost you $15,000 – $20,000.

7. Start-Up Training
Yes, you personally can do the initial person to person training for your franchisees provided time permits or you may want to hire someone who is skilled in corporate and specifically franchise training. If you hire you will be looking for a middle management to C level employee so that can cost anywhere from $40k – $100k a year. Other things to consider is how and where training is conducted. Do new franchisees only come to see you or do you go out and see them as part of the training, pre-opening or opening phase? Now you have travel costs to consider but the good news is these details are considered when determining your franchise fee and should be covered by the franchise fee.

8. Marketing and Growth

Unless you are lucky enough to have a line of people already wanting one, have a huge network of investors or go on Shark Tank you are going to have to market this opportunity somehow some way. Many franchisors will use a combination of any and all of these methods.

Google, Social and Portal Advertising
Getting your opportunity in front of those that are actively looking for opportunities. These will generate inquires directly to you. Costs for this is relevant to how rapidly you want to grow but can range from $2,000 – $20,000 per month. Side note… Get expert advice when it comes to the franchise portals as like lead sources in many industries, some will rob you blind!

Franchise Sales Organizations
Also called FSO’s, franchise sales organizations are firms that specialize in franchise development… A nice word for franchise sales. Most of these groups charge a monthly retainer fee plus a cut of the franchise fee for all units sold. Deal structures with FSO’s can be all over the map ranging from straight cash to equity.

Franchise Broker Groups
Yes, there are franchise brokers out there who act similar to recruiters but for franchisors. Currently there are about 2,000 franchise brokers in the US with the majority of them belonging to one of about 7 or 8 major groups. With most groups the franchisor will pay an annual fee to the group ranging from $1,000 – $20,000 per year and then pays the broker a commission when they bring you a new franchisee. Commissions typically are around 45%-50% of the franchise fee. While this sounds expensive, and it is, a recent study showed that franchisors have a 5 times higher closing rate with a prospect introduced by a broker than any other market method used.

The Total Costs to Franchise

As you can see the total cost to successfully franchise a business is a pretty wide range but doing it properly is paramount. Far too often we have seen great businesses skip important steps and fail in their mission to become a thriving franchise.

The total cost to franchise your business will range from $30,000 on the bare minimum low side to $250,000+.

This is quite a wide range but often is still less than expanding through additional corporate owned locations. A professional franchise feasibility study can offer a more accurate range for your business and offer the best options for you.

“What an incredible resource! I knew we had a great business but was so confused on how to begin franchising. You all have made this so much easier!”

– Gregory Sayed

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