7 Costs of Buying Into a Franchise

Buying a franchise isn't a one-time cost.

One of the hardest parts of growing a small business is building brand recognition. You want people to recognize your business by name -- and even logo -- and associate it with quality in your industry.

But what if your new business could have instant brand recognition before you even open your doors? That's what you get when you purchase a franchise of an existing business. Most of the big names we know, including McDonalds, Ace Hardware, and even Marriott, are massive collections of franchises.

While buying a franchise may seem like an easy way to jumpstart a business, however, there are a lot of associated costs. From professional fees to renovation expenses, buying a franchise is a lot more involved than you may think.

1. Franchise fee

The key cost that most people associate with buying into a franchise is the franchise fee. This is the upfront cost you pay to essentially get permission to use the company's name, logo, and other branding.

How much you need to fork over for this fee will vary based on the franchise. You can find some smaller franchises that have fees in the low four digits. Big names, like KFC and Burger King, can have franchise fees in the $50,000 range.

2. Attorney fees

Before you enter into any major contract or deal -- such as a franchise purchase with a five-figure franchise fee -- it's important to have an attorney review all of the associated documents. For example, most franchises have complicated disclosure documents, as well as rules and regulations on how you can use the branding, what you need to build, etc. And yes, there are attorneys who specialize in small businesses and franchising, so be sure you choose someone with applicable experience. Expect to pay a few thousand dollars for this service, depending on the complexity of your legal needs.

3. Accountant fees

Along with hiring an attorney, you may also want to hire an accountant familiar with franchise and business financing. A good accountant can help you understand all of the numbers provided by the franchise owner, as well as the tax implications of your investment. They can also help you set up important tools like bookkeeping and payroll services after the purchase. This is another place where your bill will likely reach four figures.

4. Supplies and build-out costs

What kind of supplies or building costs you need to factor in will vary based on the franchise. Building a quick-service restaurant from scratch, for instance, means renovations, kitchen supplies, dining room tables/chairs -- everything down to the napkin dispensers. It can easily cost up to $1 million (or more) to build a standalone restaurant such as a McDonalds.

Even if you're going with a non-restaurant franchise, you'll still need basic supplies to get going. This may mean you need specific software for your tax service or vacuums for your cleaning service. How much you need to set aside for these costs is a good question to ask that accountant you hired.

5. Inventory and overhead

In addition to supplies and basic tools, you'll also need to budget for your inventory and overhead costs. For the restaurant example, this may mean mounds of meat and pounds of potatoes. You also need to think about overhead costs -- rent, utilities, and even inspections are all part and parcel of running many kinds of franchises. This is another great question to go over with your accountant.

6. Working capital

Speaking of overhead, make sure you have enough capital in your business checking account to cover at least a few months of operating costs for your new franchise. It's very rare -- verging on unheard of -- for a new business of any kind, including franchises, to make a profit in the first 90 days. But you'll still need to pay employees, pay vendors, pay rent…you get the drift.

7. Royalty fees

If you think the franchise fee is the last thing you'll need to fork over to your parent company, think again. Most franchisees also pay monthly royalty fees for the continued ability to, well, run a franchise. Royalty fees vary a lot, but expect to owe 4% to 12% of your franchise's revenue each month.

Don't forget about time

Although not as tangible as some other costs, don't forget that building a business -- even a franchise -- takes a lot of time and effort. This is time you're not spending on other tasks, and it should be considered when tallying up the expenses of a new franchise.