Learn about the common expenses associated with starting a franchise.
Key Points:
- The cost of franchising a business can vary, but there are common expenses every prospective franchisor should know about.
- Making informed decisions and spending strategically can help new and emerging franchisors avoid budgeting pitfalls.
- Selecting the right team can strengthen the foundation of your brand and ensure that every dollar you spend counts.
If you’re considering franchising your business, you’re probably wondering how much it costs to become a franchisor – and how to set your new brand up for financial success.
The truth is that the cost of franchising a business is often higher than aspiring franchisors think it will be. From franchise development to regulatory compliance, legal fees, marketing, franchisee support and more, the expenses associated with starting a franchise can add up quickly. Because of that, new franchisors need to budget appropriately and establish solid economic strategies based on realistic numbers before entering the franchise space.
Expenses New Franchisors Pay When Franchising Their Business:
Phase One: Franchise Development
- Franchise Disclosure Document (FDD) Development: $15,000-$45,000
- Operations Manual: $0-$30,000
- Corporate Entity Formation: $400
- Audited Financial Statements: $2,500-$5,000
- State Registration and Filing Fees: $0-$750
- Trademark Registration Filing Fees: $350-$525 per class
Phase Two: Going to Market
- Franchise Sales Website: $2,500-$15,000
- Franchise Sales Presentations: $0-$3,000
- Public Relations and Validation: $15,000-$25,000
- Advertising: $0-$20,000
- Franchise Broker Organizations and Networking: $5,000-$10,000
In this guide, we’ll explore the real-world costs of franchising your business, and discuss strategies for deploying capital effectively while getting your new franchise system off the ground.
Phase One: Franchise Development
As a new franchisor, it can be helpful to think about the franchising process in two phases: the initial development phase and the later go-to-market phase. However, it’s important to remember that those phases aren’t necessarily sequential and can even overlap sometimes.
The franchise development phase involves the seven steps to franchising your business. During this phase, costs will typically be centered around developing your new franchise system. While it’s common to hear terminology about franchise developers, franchise lawyers, sales, marketing, operations manuals and other legitimate industry phrases throughout this phase, sometimes those buzzwords can get confused or conflated by dubious development companies looking to make money off of inexperienced new franchisors.
To avoid getting taken advantage of by unscrupulous franchise developers, it’s critical to know what costs to expect during the development phase of franchising your business. It’s also important to identify who is qualified to perform various development-related tasks.
1. Franchise Disclosure Document Development
Regulated under the Federal Trade Commission’s Franchise Rule, the Franchise Disclosure Document (FDD) is a mandatory legal document all franchisors are required to disclose to prospective franchise buyers at least 14 days before selling a franchise or receiving any fees.
The cost to develop an FDD can range from $15,000 to $45,000, depending on whether you’re working with a less experienced or lower-cost franchise developer that utilizes boilerplate documents, or a more experienced firm that offers direct legal counsel or comprehensive services tailored to your business.
Although a higher price tag doesn’t necessarily guarantee better work, it’s a good idea to ensure your money is well spent, regardless of budget. When comparing development packages, consider whether the developer offers options for competitively positioning your FDD, such as the following:
Franchise fee modeling
Territory structure modeling
Royalty structure modeling
Competitor evaluations
Some firms also offer additional development services and access to educational resources, like The Internicola Law Firm’s masterclasses and guides for new and emerging franchisors.
2. Operations Manual Development
The franchise operations manual is a confidential how-to guide for your franchise system. Its contents organize and communicate the company’s operational requirements, systems and procedures and should cover everything from employee training to running the franchised business.
The cost to prepare a franchise operations manual can range from $0 to $30,000, depending on whether you prepare the manual yourself or hire an expert. Fees can also vary depending on the experience level of the professional you hire, and whether your manual is published in a digital learning management system.
Regardless of the format of your operations manual, it’s important that the document is tailored to your business and conveys specific information about the management, systems and daily operations of the franchised business. Because boilerplate operations manuals can lack critical elements, new franchisors should consider working with a specialist to develop their initial operations manual.
Whether you create your franchise operations manual or hire an outside expert, remember that it is a living document that should be updated regularly as your brand matures.
3. Corporate Entity Formation
Another common cost of franchising your business is forming a new corporate entity. Your new franchisor entity must be separate from your existing business and have its own bank account, tax ID number and balance sheet. As a new franchisor, the cost of corporate entity filing fees is typically around $400. However, you should also be prepared to deposit between $3,000 to $20,000 into the new corporate entity’s bank account, depending on regulatory requirements in your location.4. Financial Statement Preparation
As a new franchisor, a certified public accountant will have to conduct an audit of your new corporate entity as part of the legal compliance process. Your CPA will use the results of this audit to prepare financial statements for your FDD and other filings. The cost of financial statement preparation typically ranges from $2,500 to $5,000.
5. Filing and Registration Fees
The franchise industry is heavily regulated at the federal and state levels. Because of that, compliance with franchise laws is critical. Depending on the locations that you choose to operate in, you should plan for the following costs as a new franchisor:
In the Franchise Registration States, franchisors are required to register their FDD with state regulators. While costs vary by location, plan to spend between $250 and $14,000 on state registration fees if you will operate in those states.
In franchise filing states, franchisors must submit a franchise filing with state regulators. Filing fees vary by location and typically range from $50 to $1,000 in those states.
It’s important to note that state franchise registrations and filings must be renewed according to local laws. Consult a franchise attorney to determine the specific regulations in the states where your franchise system will operate.
Trademark Registration
Your business name, logo and slogans are how customers identify your brand. Because of that, it’s critical to register and protect your trademarks with the U.S. Patent and Trademark Office as early as possible.
Because the trademark registration process can be extensive – often requiring hours of research, detailed applications and legal reviews – the cost of protecting your trademarks can vary depending on your lawyer. Some franchise attorneys include the cost of trademark registration in their franchise development packages, so it’s a good idea to ask your lawyer if those options are available to you.
Learn about our franchise development and trademark registration services.
Phase Two: Going to Market
Although completing the initial development phase of franchising your business can be exciting, it isn’t time to celebrate yet. Instead, think of development as a stepping stone to the next phase of your franchising journey: going to market. As you begin to enter the franchise world, it’s time to learn about the industry and make informed decisions about concepts including, but not limited to, the following:
Franchise sales process
Onboarding franchisees
Hiring (and supporting) the right people
Legal compliance
Continuous improvement
Alongside those topics, it’s also important to spend capital efficiently by developing a go-to-market strategy that supports your brand’s growth over time.
1. Franchise Sales Website
As a franchisor, telling a compelling brand story is the key to attracting like-minded franchisees and customers. A great way to do that is to create a franchise sales website that communicates your founder story alongside your brand’s purpose, opportunity profile and transformation potential for prospective franchisees.
The cost of building an initial franchise sales website can range from $2,500 to $15,000, depending on content and your web developer’s experience level. As your brand matures, it will be important to continue improving your website with updated content.
2. Franchise Brand Positioning
As a new franchisor, positioning your brand for franchise sales is critical for growth. Competitively positioning your franchise system often includes, but isn’t limited to, the following:
Brand strategy development
Establishing a franchise sales process
Differentiation from competitors
Research and content development
Depending on whether you choose to handle parts of the process yourself or hire industry experts, you can typically expect to spend between $0 and $2,500 on brand positioning during your first year as a new franchisor.
Check out our guide to positioning your brand to win at franchise sales.
3. Franchise Sales Presentations
Franchise sales are a critical part of business growth. One of the biggest franchise sales mistakes emerging franchisors make is failing to identify their brand’s franchise opportunity profile – and develop strategies to present it to prospective franchise buyers and brokers.
The cost of franchise sales presentation development during your first year in business, including the creation of marketing materials, usually ranges from $0 to $3,000, depending on your strategy and hiring outside experts.
4. Public Relations and Validation
Although not all franchisors need a public relations strategy, for those who decide it’s worth it, leveraging PR and digital media to jumpstart franchise sales can be valuable. While working with a PR firm typically won’t impact sales directly, it can help new franchisors reach new audiences, develop a brand narrative and increase validation.
New franchisors should expect to spend between $15,000 to $25,000 during their first year working with a reputable PR agency.
5. Advertising
Franchisors often choose to advertise their brands in different ways, depending on their industry. Popular options include digital advertising tools like pay-per-click ads, social media and sponsored content. Depending on budget and strategy, new franchisors can expect to spend between $0 and $20,000 on advertising during their initial launch phase.
6. Franchise Broker Organizations and Networking
In your journey as an emerging franchisor, you might find it valuable to join broker groups or attend franchise conferences to gain knowledge and network with industry professionals. New franchisors can expect to invest between $5,000 to $10,000 in those efforts during the first year.
How can new franchisors avoid common budgeting mistakes?
As a prospective franchisor, it’s important to remember that franchising your business often costs more than you think. With initial development expenses ranging from $18,150 to $94,000, and go-to-market costs ranging from $22,500 to $75,500, launching a franchise is a serious investment that requires extensive financial resources. By spending strategically during both phases of the franchising process, you can utilize your capital more efficiently.
Keep in mind that going straight to a franchise developer, or working with a franchise broker, can result in higher costs due to “middleman fees” or referral commissions. In some cases, those fees might add up to $20,000 to $30,000. Because of that, it can be a good idea to incorporate organic growth into the first couple of years of your five-year success plan.
To avoid wasting time and money, it’s also critical to work with qualified professionals when franchising your business. Before hiring a franchise developer, always perform due diligence to ensure they have the proper credentials and experience. Although some one-stop-shop developers may claim to offer legal services, working directly with a licensed franchise attorney can prevent potentially costly legal mistakes.
