Low Cost Franchise
If you’re looking for a franchise with low startup costs, our hope is that the following information will aid you in your search for an affordable franchise.
The first step in narrowing the field is determining which franchises you can afford, even before you consider their startup or ongoing operational costs. All franchises will require all applicants to meet their minimum requirements for both net worth and available liquid capital, and most will require you to have a good credit rating.
So before diving in deeper, first select only franchises where you meet those minimum requirements. Those requirements are strictly enforced, as franchisors don’t want you to face undue challenges when you seek financing nor when you’re open for business. So hold off on applying to any franchise if you don’t meet those minimums, even if you think you could afford the low-cost franchise in question.
Initial Franchise Fee
Surprisingly, the initial franchise fee shouldn’t be a significant determinant in selecting a low cost franchise. This one-time fee typically represents only a small portion of your investment. These fees are often governed less by how much a franchise costs overall to start or to operate, and more by the process that franchisor is using to bring their franchise to market. An unusually low or high franchise fee is not predictive of the overall cost of the business. Instead, you should focus on the total initial investment as well as the ongoing costs to operate the franchise.
Franchise Startup Cost
Every franchise is required by law to disclose to you the estimated total initial investment in Item 7 of their FDD, or Franchise Disclosure Document. You’ll see each franchise will have a low and a high estimate, producing a range. It is these costs on which you should focus – as they include not only the initial franchise fee, but rent, inventory, equipment, and all other fees and costs needed for the franchised business.
Franchise Operating Costs
Of course knowing how much a franchise costs to start is only one, albeit important, part of your research into affordable franchises. Unfortunately, franchisors are not required to disclose to you the average ongoing operating costs of a unit, nor the all-important statistics such as average gross revenue per unit, net profit margins, etc.
It is up to each franchise whether or not to disclose this information; if it is disclosed, it will reside in Item 19 of the FDD. (The Zoom Room, for example, does include an Item 19 statement in its FDD including full P&L’s with annual revenue, costs, profits, and margins.) Be sure to ask each low-cost franchise you research whether or not they have an Item 19 statement, and if they do, read it carefully!
Popular options for financing low-cost franchises include friends and family or angel investors, SBA Loans, and 401K Rollovers. Some franchisors provide their own financing; others have strong partnerships with lenders; and others will leave it to you to secure all aspects of your own franchise financing. We have a handy free franchise financing calculator available on your site to give you instant results after you enter some basic information.
Franchise Royalty Fees Comparison
Just as we recommend not focusing on the initial franchise fee itself, and instead consider the overall initial franchise investment, we offer the same advice with regard to royalties. A low royalty percentage or fee is not inherently indicative of a low-cost franchise that will provide a high return on your investment. Royalties are almost always calculated on gross sales, and don’t take into consideration your operating costs.
It’s easy to imagine a franchise with a seemingly low royalty rate, but if gross sales and operating costs are both high, this could mean very slim profit margins. On the contrary, a franchise with a healthy profit margin might have higher royalty fees due, but yield a far better return on your initial investment.
As we ourselves offer a low-cost pet franchise (indoor dog training), we have provided a helpful side-by-side comparison of franchise costs specific to the pet industry, if you’d like to check that out.
We’d be delighted if you’d like to learn more about the Zoom Room Dog Training Franchise.