How Much Money Do I Need To Franchise My Business?
As a franchise attorney who often advises business owners that are thinking about franchising their business, I am often asked “How much money do I need to franchise my business?” or “What does it cost to franchise my business?”
The conversation usually starts like this:
BUSINESS OWNER: How much money should I budget to franchise my business?
ME: Let me start by giving a useless answer. To franchise your business, you’ll need between $5,000 and $500,000.
BUSINESS OWNER: Wow, that really is a useless answer.
The amount of money you need to start franchising depends on where you are today, and what you want to accomplish.
Scenario 1: You own a small chain of successful restaurants. An experienced, well-capitalized restaurateur has approached you about developing one franchise*, and after a few months of discussions, you’re ready to go ahead. You plan to do this deal, see how it goes, and then in a couple of years decide if you want to pursue franchising more strategically.**
You need an experienced franchise lawyer who can put together a fairly standard Franchise Disclosure Document and franchise agreement. Assuming you have all of the information needed for the FDD, assuming that you’re not in a franchise registration state, assuming the franchise agreement is not negotiated, and assuming a few other things as well, you’re at the minimal end of the cost to franchise.
Scenario 2: You are part-owner of a small chain of successful restaurants. Your three-year objective to have 50 franchises open, with signed deals for 200 more in the United States and several other counties.
Currently, your restaurants have widely varying menus, designs, and operations. You have nothing that remotely resembles an operations manual. You do not have design or construction standards. You do not have a registered trademark, and in order to obtain a registered trademark you’ll need to change your brand name and logo.
In Scenario 2, you need a lot more capital, and you probably need to adjust your time frame and objectives.
To estimate how much money you need to franchise your business, you first need to do a “gap analysis.” In other words, you need to figure out where you are today compared to what it will take to get to where you want to go. Your gap analysis would identify the areas of your business that need to be developed or improved in order to maximize your likelihood of success in franchising. Once you’ve identified those areas, you can estimate their respective cost. Some of the areas to look at include:
· Unit Operations
o Products and Services
o Real Estate
o Supply Chain
o Point of Sale Systems
o Management, Evaluation, and Reporting Systems
o Operations Manual
o Developing the Franchise Offering
o Strategic Plan
o Marketing Plan
o Financial Plan
o Franchise Disclosure Document
o State Registrations
o Franchise Sales
· Franchise Development
o Franchise Marketing
o Lead Qualification and Tracking
o Discovery Day Process
o Franchise Support
All that being said, a more straightforward answer is that a start-up franchisor often needs at least $75,000 for operations, legal, initial marketing, and other costs. To maximize franchise growth, support, success, and value, a budget of $200,000 is often recommended.
* Sorry, but there is no “only doing one franchise” exemption from the requirements to prepare an FDD and comply with franchise laws.
** Selling just one franchise with no strategic plan is probably not a good idea.