When comparing the costs of franchises, the different fees can be both confusing and misleading. While some franchise investments truly are low-cost, such as home-based businesses and businesses requiring little to no investment in real estate or equipment, others promote low franchise fees only to charge you later for things such as training, marketing, and ongoing support--fees that should be included up-front. In order to accurately determine the costs of purchasing and operating a franchise, you should carefully review the disclosure document provided to you by the franchisor. It will cover all of the fees involved in the purchase and operation of the franchise. This section is designed to break down those fees and explain each of the financial elements you will see in the UFOC. It will explain the different types of financing available to help you get the capital you need.

Franchise fee

The first fee covered by the UFOC is the initial franchise fee. Franchisors are required to disclose the total amount of the franchise fee as well as the conditions by which this fee is refundable. The initial fee includes all fees and payments for services or goods received from the franchisor before the franchisee's business opens, including licensing fees, initial training, and other up-front assistance. It is important to know what services are included in the initial fee to avoid paying for them later. Not all initial fees are required to be paid in lump sum. Many franchisors will allow installment payments over the course of a year or so, and this will be spelled out in the disclosure document. Circumstances in which the initial franchise fee might be refundable can include the franchisee's application being declined or the franchisee being unable to complete training for one reason or another. Understanding the terms for refunds will make sure you don't lose your money if your franchise contract falls through.

How much is a typical franchise fee? Franchise fees vary drastically among different franchisors, but they average from $20,000 to $50,000. Many companies give incentives to Veterans, offering a percentage or a lump sum off of the initial franchise fee. What are some Vet discount examples?

Fantastic Sams gives Veterans 25% off the initial franchise fee
Midas Intl. Corp gives Veterans $5,000 off the initial franchise fee
Baskin Robbins gives Veterans 20% off the initial franchise fee
Coffee Beanery gives Veterans 15% off the initial franchise fee

These discounts may seem minor, but the money Veterans save on franchise fees can be invested later into training costs, advertising, and more. The incentives mean more than just a discount, however; Vet-friendly franchises value the skills and experience that Veterans can bring to their franchise, and as a result they go out of their way to invest in Veteran franchisees.

Other fees

In addition to the initial franchise fee, franchisors are required to disclose the other costs you will be required to pay over the duration of your franchise ownership. These can include recurring costs such as royalty fees or a one-time cost such as a transfer fee which is required when you sell the franchise. Along with a description of each fee and the amount, the franchisor is required to state all payment due dates, if any of the fees are non-refundable, and to whom the fees are payable (to the franchisor or to an affiliate of the franchisor). Examples of fees that may be contained in this section include:

Royalties (usually between 4% and 10% of total gross sales paid monthly)
Lease negotiation
Construction
Remodeling
Additional Training (usually at a cost per person)
Advertising (usually a percentage of total gross sales paid in addition to royalties)
Group Advertising
Additional Support & Assistance
Audit
Accounting/Inventory
Transfer (a single lump sum when you sell the franchise)
Renewal (a single lump sum when you renew your franchise agreement)

When comparing the costs of franchise ownership to the costs of starting a new business, look at what fees are included in both endeavors and which are unique to franchises. Franchise fees, royalty fees, transfer and renewal fees are all unique to franchise agreements and are not included when you start up your own business. But while advertising costs of a franchise may equal only 5% of your monthly revenues, advertising costs of a business start-up can be significantly higher because your business is yet to establish a name for itself. In addition, you may have to pay more for financial and legal assistance. There is no definitive answer to whether a franchise is less expensive than a start-up business. It depends on the nature of the business itself. One way to find out how your own costs compare is by talking with current business owners. Discussing the costs of doing business with franchise owners and independent business owners in the same industry can give you a better idea of the cost advantages of both. Not all business owners will be quite as forthcoming with financial details, but many will be happy to talk to you and discuss their experiences and expertise.

Initial Investment

In addition to the initial franchise fee and other fees associated with ownership and operation of the franchise, the franchisor is required to disclose an estimate of the initial investment required. In the disclosure document, the franchisor must state all of the expected investment expenses, to whom the payments are made (some are payable to the franchisor, while others may go to affiliates or other partners), the payment schedules, whether any of the payments are refundable, and if there are any financing options available to assist you with the initial investment. These investment costs include, but are not limited to, property/real estate, equipment, construction, remodeling, initial inventory, utilities such as electricity and phone, business licenses to operate your business legally, and other prepaid expenses.

In addition to the expenses mentioned above, most franchisors will also include practical expenses such as travel and living expenses during training that can include airline trips to training locations, hotel expenses, meals and incidentals. Because training can last several weeks, these costs can be as high as $5,000 to $10,000. The savings achieved through Veteran discounts can often be used to pay for this training!

Lastly, the franchisor will make sure the franchisee has enough working capital to operate the business without revenues for as long as it is expected to take until revenues cover all costs. For some franchises, this can be as little as three months; others, however, may require a year or even in three years in working capital. This will ensure that even if the development of new business is slow, the franchisee will be able to continue operating his or her business, including paying for advertising, training, and more.

So how much do these costs run the the typical franchise owner? Below is a list of some population Vet-friendly franchises, along with their individual financial requirements.

The Coffee Beanery: $27,500 initial franchise fee; $300,000-$450,000 total estimated investment
FastFrame USA Inc.: $25,000 initial franchise fee; $105,800-$150,300 total estimated investment
The UPS Store: $29,950 initial franchise fee; $160,940-$266,589 total estimated investment
Geeks On Call: $25,000 initial franchise fee; $53,350-$82,150 total estimated investment
Gymboree: $45,000 initial franchise fee; $141,000-$246,000 total estimated investment
Maggie Moo's: $30,000 initial franchise fee; $237,000-$336,730 total estimated investment

Financing Options

When looking into financing for your new franchise, it is important to consider all of the different financing options available. First, check out the financing available from the franchisor. Even if the franchisor does not offer their own financing program, they can often assist you in the process by helping you write a business loan or by assisting you in securing a loan from a trusted lending institution.

Another important thing to know is the franchisor's requirement for franchisee investment. Many franchisors want to see a demonstrated investment in the business by the franchisee and, as such, require 35% or more of the investment to come directly from the franchisee unattached to a loan or other financing tool. If you decide to approach a bank or commercial lender for the rest of the amount, make sure you have the paperwork required to apply for a loan. Franchisees have the advantage of the franchisor's history and success, so providing a loan for a franchise is oftentimes less risky for banks than providing a small business loan for a start-up. While that will serve as a tremendous advantage in financing your franchise, you still need to have a solid business plan (which the franchisor may help you write), a strong financial history including personal credit history, and a completed loan application that the bank can provide you. If your franchisor doesn't provide assistance in the development of business plans, you can get all of the information you need on TVC's website under Starting a Business. Click here to learn more about how to write a strong business plan.

In addition to approaching a traditional lender or the franchisor itself, there are other options for obtaining additional capital. Depending on the amount of money you need, you may consider approaching family or friends to borrow the funds. Although this may seem simpler and less complicated than obtaining a loan, the obligations to pay back the money are just as serious. If you borrow from friends and family, make sure to draw up a formal agreement stating the terms to which you will return the money, including whether you will pay interest on the loan, how many payments you will make to pay back the loan, and when those payments will be. Never borrow more money from a friend or family member than they can afford to lose and never borrow more than you think you can reasonably pay back quickly or in a time satisfactory to the lender. If the thought of borrowing from friends or family makes you uneasy, you can also consider forming a business partnership to allow another individual to share in the financing and investment. Before forming this partnership, however, there are a number of questions that you and your potential partner must first answer. How much control will the partner(s) have over the business, and will they gain more control if they invest more money than you? If you have disagreements or problems with your partner(s), how will they be settled? If you decide to sell the franchise or one partner no longer wants to be involved in the business, how will those circumstances be resolved? Defining the terms of a partnership before entering into business together is necessary for the partnership to remain strong throughout the duration of the business.

The final option for financing, in addition to approaching the franchisor, traditional lenders, friends and family, or business partners, is to turn to yourself for financing. How can you raise additional personal capital? Many business owners do so by taking out a personal home equity loan or a home equity line of credit. These are popular ways to finance because they often come with lower interest costs than other forms of credit. What is the difference between the two? A home equity loan is an additional second mortgage loan that provides you with your money in one lump sum. A home equity line of credit works like a credit card and provides access to cash on an ongoing basis. A home equity line may be preferable for business purposes because it provides ongoing cash throughout the operation of your business and only requires you to pay interest on the current outstanding balance; however, it typically carries an adjustable interest rate (unlike home equity loans) which can leave you with higher-than-anticipated payments if the interest rate goes up. Regardless of the type of loan you choose, if you use your home as collateral, make sure you can cover your monthly payments and be sure you understand what the payments cover and what your requirements at the end of the loan will be. If you run into trouble and cannot make payments, you risk losing your home. Like owning a franchise, the decision to borrow against the equity of your home is one that should be made together with your family.

Whatever financing option you choose, weigh all of the pros and cons carefully to make sure you choose the option that is the most affordable and financially feasible for your unique situation. Talk to different lenders and financial experts to help you make the right decision. Being comfortable with your financing and knowing exactly what you owe and what your payments mean each month is an important step in getting the right financing for your business.