Franchise costs should be disclosed on a required form called a Franchise Disclosure Document, or FDD, for short. Every franchiser is required to present a potential franchisee with this document and it is required to be written in plain English.
Franchise fees – You will need to write a check for an initial franchise fee when you sign the franchise agreement. Sometimes there is a discount for minorities or veterans.
Startup Costs – You need products and materials which you will probably buy from the franchiser, saving money with their purchasing power. Depending on the franchise, you may need equipment, both to run the business and for office expenses. You will also need business cards, letterhead, and so forth. You may need to pay for your initial training.
Startup capital – In addition, you will need startup capital to provide money for operations through the startup period when most new businesses, franchises included, don’t have enough income to offset all the expenses. For example, in a restaurant, you must buy food and pay your staff before people start paying to eat there. And, the number of customers builds; they don’t all come in the first day.
Royalties – A portion of your ongoing business income will be paid to the franchiser. Some of this goes for things like advertising, payroll processing and other expenses that benefit you.
Miscellaneous fees – These can add up. You may pay for local advertising, interest on financing part of your investment, payment for IT work, training for you and your staff, compliance audits if required, local permits and fees, a renewal fee at the end of your agreement period, and a fee if you want to add another territory. Look these over carefully and make sure your questions are clearly answered.
Total investment – The franchisor must disclose the total investment to you.
Everything has a cost. Be sure you have identified and understand them. Thankfully, franchisors are required to disclose costs to you. You may want to talk to other franchisees. You should certainly talk things over with your franchise consultant who can help you properly count the cost.
