Is That Low Cost Franchise Really Low Cost?

You might have hesitated to consider buying a franchise because you felt you needed a seven-figure net worth to afford it. Don’t. While there are some franchises where that is the case, a great many do not require an investment equivalent to a “king’s  ransom.”

In fact, there are plenty franchise opportunities where you can own a franchise for a few thousand dollars.

That is an exciting thought. For an amount that is about as much as your credit card limit, you could own a franchise with all the rights and privileges of any other franchisee.

Often franchisors declare these to be “low cost” opportunities. Just because a franchisor categorizes something as “low cost” does not make it so. Usually they make this claim just because the initial investment is relatively small compared to other franchise opportunities.

The initial investment fee, however, is just one aspect to consider in determining the financial potential of a franchise. Thus, just because you can get into a franchise “on the cheap” does not mean it is low cost. Sometimes, franchises will attract prospects into the opportunity with a low initial franchise fee, but make up for it in other ways. So before you fully commit to that “low cost” opportunity, you should examine all the aspects of the franchise. At a minimum, you should consider:

  • Ongoing Royalties: The initial franchise fee may be low, but what are the ongoing royalties associated with the opportunity? If the ongoing royalties are excessive relative the ongoing support, what you did not pay on the front end, the francisor intends to make up (and then some) over time.
  • Training Fees: The initial franchise fee may be low, but what does that include? If the initial franchise fee only gets you the rights to operate the business and you still need to pay for (and attend) required training, the franchise opportunity may not be as low cost as you thought.
  • Ongoing Support: The initial franchise fee may be low and the ongoing royalties a good value, but you also have to take into account what the franchisor is and is not doing for you. For example, if the business model requires that you have a website or sophisticated billing system, and you need to build those from stratch, you need to factor that into your determination. Low cost may not be as low as you thought.
  • Equipment And Supplies: Some proclaimed “low cost” franchise opportunities have a low initial franchise fee, reasonable ongoing royalties and no training fee. They do, however, require that you, the franchisee, purchase all equipment and supplies from the franchisor. Not surprisingly, the franchisor sells these items at a hefty profit.
  • Franchise Term: When you purchase a franchise it is generally only for a fixed term, which varies from franchise to franchise. When that term expires, the franchisor generally requires you to pay a renewal franchise fee or you forfeit your franchise rights. While this payment is generally only a percentage of the initial franchise fee, it is important to consider. If the franchise term is short, a franchisor can make up for  low initial franchise fee with an unusually large renewal fee.

No, you do not need to risk your first born child to own a franchise. There are many low cost opportunities available. It is important to remember, however, that not all low cost franchises are created the same. As a potential buyer of a franchise, you are best advised to do your homework before you fully commit.

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