When people ask me about the cost to buy a franchise, they usually mean the franchise fee. That’s the number on the brochure. After more than 15 years in franchise development, I can tell you the fee is rarely what keeps buyers up at night. The total investment, plus the cash you need to live on while the business ramps up, is what matters.
Where the Cost to Buy a Franchise Shows Up: the FDD
Under the FTC Franchise Rule, the franchisor has to give you its Franchise Disclosure Document at least 14 days before you sign anything or pay any money. Three sections cover the money:
- Item 5, Initial Fees. Mostly the initial franchise fee, which may be non-refundable.
- Item 6, Other Fees. Royalties, ad fund contributions, technology, training, renewal and transfer fees.
- Item 7, Estimated Initial Investment. The low-to-high range to get open: build-out, equipment, signage, inventory, deposits, licenses and a working capital line.
The Franchise Fee Is the Easy Part
The fee buys you the right to use the brand and system, and usually your initial training. The FTC says initial fees typically run from tens of thousands of dollars up to several hundred thousand. Check the brand’s Item 5 for the real number, and ask whether there are discounts for veterans or multi-unit deals.
Item 7: Plan for the High End
Item 7 is the table I want you to study. The range is often wide, and that’s not sloppiness. A second-generation restaurant space and a raw shell that needs a full build-out are two very different checks. Your market and your landlord can move you from one end to the other.
My advice is simple. Budget for the high end. I’ve never had a buyer tell me they regretted having too much cash.
Look hard at the “additional funds” line too. It covers a stated initial period, often just a few months. The FTC warns it can take more than a year to break even, and some franchises never do. It suggests estimating your personal living expenses for up to two years. I agree.
Ongoing Fees After You Open
Royalties are usually a percentage of gross sales. The FTC points out you typically owe them even if you’re losing money. Add the marketing fund, any local ad spend requirement, and technology fees, and build all of it into a monthly budget before you commit.
Costs You Won’t Find in the FDD
- Your own income while you ramp up
- Accounting and legal help (the FTC specifically flags these)
- Lease extras and personal guarantees
- Hiring and turnover
- Interest and loan fees
How Buyers Pay for It
Most of the buyers I work with combine savings, home equity, retirement rollover funds or a bank loan. The SBA’s guide to buying a franchise is a good place to start, and SBA-backed loans are a common route. Either way, have a franchise attorney and an accountant review everything before you sign.
Check the Numbers With Franchisees
Item 20 lists current and former franchisees. Call them. Ask how close their real opening cost came to Item 7, how long it took to pay themselves, and what they wish they’d budgeted for. Those calls are worth more than any brochure.
Want Help Running the Numbers?
If you’re looking at a brand and want a second set of eyes on the costs, I’m glad to talk it through. No pressure, just a straight conversation about whether the numbers work for you. Call me, John Henning, at 267-417-4980.
Sources
- FTC, A Consumer’s Guide to Buying a Franchise (Sept. 2020): https://www.ftc.gov/business-guidance/resources/consumers-guide-buying-franchise
- FTC Franchise Rule, 16 CFR Part 436 (eCFR): https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-436
- U.S. Small Business Administration, Buy an existing business or franchise: https://www.sba.gov/business-guide/plan-your-business/buy-existing-business-or-franchise