How much money do you need to start a franchise?

How much money do you need to start a franchise?

The franchise development process could be approached from a variety of different perspectives.  The traditional model would be to hire consultants, a franchise attorney, spend the upfront dollars needed to put your franchise program together, then go to market and execute the franchise sales model on your own merit.  The majority of the franchisors entering franchising have difficulty making this model work in that they have little or no experience in franchise development in addition to a schedule that does not allow for the time commitment that comes with franchise development.  What has happened in recent years is this transition where franchise development firms have been forced to take an active role in not only the development of the franchise as a franchise is created for a brand, but also in the marketing and sales efforts required to sell and recruit the first franchisees into the system.  This strategic partnership aligns parties involved in the franchise expansion model and creates a win-win type of scenario. 

The question of how much money do you need to start a franchise has changed.  In the past, the answer would have been $150,000 to $250,000 in upfront money to develop the franchise, hire the qualified franchise attorneys and then you should have $50,000 to $100,000 in marketing dollars budgeted for your initial development efforts to successfully market and promote the new franchise brand.  For most businesses entering franchising, this was a difficult obstacle to work around and generally, the idea of this kind of cash outlay scared most brands away from the idea of franchising entirely due to the significant risk associated with that type of investment.  In today’s franchise development market, the cost of franchising a business has come down significantly with more firms taking payment over a longer time period and based on the success of the program.  It is not unheard of to have a successful franchise model come to market with $20,000 or $30,000 for the development work and then a marketing budget of $10,000 or $15,000 to promote and market the new franchise brand.

Mosquito Terminators was one such brand and a Franchise Marketing Systems client who in 2010 launched the franchise system with a total development budget of $25,000 including marketing dollars and within three years had sold over 180 units and sold the entire franchise system to a larger pest control company.  The examples of successful franchise launches are plentiful when reviewing actual dollars spent as to how many franchise systems have effectively scaled their business model with a relatively lean operating budget.  From our experience in the franchise development market, there certainly is a certain benchmark of budget that must be in place to take a brand into franchising, possibly that number should be $35,000 or $40,000 to account for development work and marketing efforts for the franchises sold.  But if the right franchise development team is in place and the franchisor has an effective strategic plan for early stage franchise growth, the franchise system will fund itself in a short time period.  What we have seen is that budget alone is not what makes great franchises come to life, the successful traits are much less tangible.  Great startup franchisors have grit, salesmanship, great leadership and communication skills and understand the difference between franchisee number 1-10 and franchisee 10 and beyond.  These effective early stage franchisors don’t focus on the upfront money being paid by each franchisee and more so on the long-term opportunity that comes with each new franchise relationship.  The franchisors that make this model work invest in the relationships and treat franchisees with respect and quite literally grow business people out of the franchise owners. 

Franchising is an entrepreneurial, small business owner’s expansion tactic.  Much like small business, it isn’t always the dollars that decide who wins and loses.  Although capitalization certainly helps, the people that tend to be successful have never-ending optimism and courage to step foot into the battlefield and execute on a plan that to most might seem like a difficult goal to attain.  Even when brands come to me with significant budgets for franchising, my advice is to save your money, invest $40k-$50k, get your franchise up and running and prove that you can be a good franchisor with your first 3 or 4 franchises, then in year two or three you can be more aggressive with your growth plans and sell many more units. 

For more information on how much money you need to start a franchise, visit the Franchise Marketing Systems Home Page:

www.FranchiseMarketingSystems.com

Chris Conner

President

Franchise Marketing Systems

[email protected]