This may come as no surprise, but opening a franchise probably isn’t going to be cheap. But forewarned is forearmed, so let’s take a look at some of the common costs associated with opening a franchise.
Franchisors often charge a franchise fee that needs be paid at the start of the agreement – either in full or as a percentage – in the form of a deposit. You’ll likely have to sign a deposit agreement,and the deposit may or may not be returned to you if you decide not to go through with the franchise.
In Alberta, for example, this refundable deposit can be up to 20% of the initial franchise fee. Once you’ve made the agreement, however, the initial franchise fee can vary from as little as $5,000 to as much as $75,000 — possibly more.
The average initial franchise fee in Canada is $23,000. This fee covers costs like support, training, franchisee recruitment, grand opening launch, franchise development and site identification. In general, the initial fee is higher the more recognized and established your franchisor company is.
Aside from initial franchise fees, royalties are often due, either weekly or monthly, to give the franchisor a portion of your sales. These can vary from 0–20% of gross (total) sales, depending on the level of support and services provided to you. Some franchises don’t charge an ongoing royalty fee, but the cost is often built in through rebates or mark-ups on products or services.
Aside from the franchise fee and royalties, you may have to pay other costs, like advertising fees. Depending on your franchise, you might have to make contributions to an advertising fund for the franchise system as a whole. This means that fees from all locations can be pooled into a much larger budget, allowing for cost sharing of national or regional advertising.
You’ll also need an equity investment – money to help keep your franchise location afloat until you’re profitable. On average, this investment amounts to around $160,000 in Canada. Other costs that you may run into could include research and development funds, leasehold improvements, furniture, fixtures, equipment, supplies and costs of employee training. Insurance costs are often included within the franchise agreement, but be sure you’re adequately insured before you open your doors. Like we said, not cheap!
So how much do I need to pay to open a franchise?
Estimated overall costs to opening a franchise can range anywhere from $50,000 or less for service franchises to as much as $500,000 or more for more sophisticated franchises. For more information, visit the Canadian Franchise Association‘s website.