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The Real Cost of Franchising Your Business

It’s often said that the biggest mistake new franchisors make is undercapitalizing their new businesses. This happens because companies new to franchising do not realize that the most expensive part of the life of a franchisee relationship is in the early months when a franchisee needs training and intense levels of assistance. It is a mistake to project expenses evenly over the life of the relationship; experience teaches that new franchisee expenses are heavily weighted to the front end.

It is also a mistake to assume that the initial fees paid by a franchisee will cover all of the franchisor’s expenses in this early phase. In addition, other initial expenses of a new franchising program must also be anticipated; they will be incurred long before franchise fees begin flowing. Here is an overview of the costs you’ll need to budget for when franchising your business.

True cost of franchising your business

Trademark registration fees

If your company has not yet filed for a federal registration of its trademark with the U.S. Patent & Trademark Office, you’re not ready to begin franchising. This is not an especially expensive process, and sure, you can file on your own online, but be aware that the trademark is the cornerstone of your franchise program, so you have got to get it right.

“For companies in competitive industries—and that’s most new franchisors—I always urge a search and assessment as part of the application process so we can evaluate the risks involved with a particular trademark,” advises franchise-savvy Washington, DC, trademark attorney Paul Jorgensen. “I usually suggest a budget of $2,500, but if things go smoothly, it can be considerably less than that.”

Operations manual

Creating the print or online operations manual for training and ongoing franchisee guidance can be a large undertaking, but many new franchise systems develop their manuals in-house, so it ends up not being a particularly significant expense item. If you go to an outside development firm, however, this expense can run into the thousands of dollars.

Legal documents: Contract and Franchise Disclosure Document

Assembling your franchise agreement and disclosure document is a major expense of a new franchise program. We tell our clients that this is an essential cost of doing business as a franchisor, but it can surprise businesspeople who are new to the industry. By the time it is done, this set of legal documents can run a couple hundred pages. Budget $20,000 to $30,000.

Legal fees/state franchise registration fees

Each of the 14 franchise registration states and a smattering of the business opportunity states will require application fees to accompany your filings. A national filing will involve something north of $6,000 in initial filing fees; plus, you should budget approximately $10,000 to $15,000 in legal fees to handle the registration process.

Of course, there is no mandate for any franchisor to launch and pay for a national rollout of a new franchise program. Better approach: Take one region at a time, and stay as close to your home base as you can during your first few years of franchising.

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Accountant’s fees/audited financial statements

Creating a franchise program involves a substantial accounting expense for the preparation of annual audited financial statements, which are required by the Franchise Disclosure Document (FDD) rules. Howard Tatz , a CPA with New York City-based Raich Ende Malter & Co. LLP, suggests that a first-time franchisor audit should involve reading all of the company's financial records, including its franchise agreement and franchise disclosure document; creating initial financial statements and disclosures, including revenue recognition and other financial policies; and creating a detailed consideration of the company’s capital structure.

“Under the Internal Revenue Code, a franchisor is subject to revenue recognition rules that differ from Generally Accepted Accounting Principles [GAAP],” Tatz says. “Our clients have found that it pays to develop a capital structure that anticipates the nature of a franchising business.” Accounting fees for an audit vary widely, generally ranging from $4,000 to $15,000 depending on the complexity of the program and the professionals you choose to assist you.

Recruiting franchisees

Once all your paperwork is in place, your next task will be to locate qualified and interested prospective franchisees, which can be a daunting task. Your budget must take into account the costs of print advertising, your internet presence, other media, and the expense of attending franchise trade shows. Your costs here will vary depending on whether you plan to do the recruiting on your own or to retain the services of a franchise broker network that can locate qualified prospects for you.

Hiring franchise talent

Leave room in your budget for the specialized talent and experience of employees who bring franchise experience to your team. There is no faster way to push your organization up the franchise learning curve than by hiring qualified franchise personnel to work for you.

Franchising your business—anticipate your costs

A new franchise program is like most business ventures in that it takes careful planning and a healthy respect for the real costs likely to be involved. However, unlike many other ventures, franchising has remarkable, almost unlimited revenue potential. Anticipate and manage those expenses, and build toward your revenue goals.