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Franchising is a popular way to start a business because it’s much less risky than creating a business from scratch. You’re buying into a successful, established business with built-in name recognition.
With a franchise, you’ll sign a contract agreeing to do business in accordance with the rules and regulations of the parent company in exchange for rights to the company’s logo and trademark. The franchiser will provide you with training and support, but you’ll be required to pay annual franchise fees, royalties and marketing fees. You will also be required to purchase products from the parent company. In some cases, purchasing a franchise gives you exclusive rights to the brand or product in a specific geographic area.
Buying into a franchise doesn’t guarantee success. You’ll still have to invest time and effort into the business. But the business model has proven effective for hardworking entrepreneurs throughout the world.
Fees vary greatly from one franchise to another. You could spend just $10,000 to start a franchise, or you could upwards of $1 million.
One of the first expenses is the initial franchise fee, which typically falls in the range of $20,000 to $50,000. This covers the cost of initial training, set-up and support. You’ll also pay a significant amount of money to rent or buy a facility and equip it with inventory and supplies. Inventory alone often costs anywhere from $25,000 to $150,000.
- Brand recognition - Everyone recognizes names like McDonalds, Starbucks and Subway. When you buy a franchise, your business has instant name recognition.
- Support - In part, the fees you pay the franchising company cover the cost of training and support. The company will guide you through the process of opening and operating your business. With that kind of help, you’re more likely to succeed.
- Cost - Buying a franchise is expensive. It can cost $1 million or more to buy into one of the most popular franchises.
- No flexibility - You’re not really in the driver’s seat when you own a franchise. There are lots of rules and regulations. The parent company tells you which products and equipment to buy, and how to market the business.
There’s a lot of confusion about the difference between a business license and a business franchise, but the terms are not interchangeable.
In general terms, a business license involves purchasing the rights to use a certain business name or model. Home-based businesses, for example, are often structured this way. The relationship between the purchaser and the licensing organization is not as close as with franchises. There are no strict requirements on how to run the business, and very few - if any - recurring fees. The licensee may purchase products from the licensing organization, but he or she receives little in the way of ongoing business support.
Be careful when purchasing a business license, however. Some companies try to sell licenses when what they’re actually selling is a franchise. This is illegal. Do your research before committing to any license purchase.
The cost of licensing a business varies greatly based upon the type of business. You could spend anywhere from a few hundred dollars to many thousands of dollars. However, licensing a business is generally far less expensive than buying a franchise.
- Cost - When you license a business, there are no franchise fees, marketing fees or royalties. You’ll pay an upfront fee to purchase the license, but recurring costs will be minimal.
- Freedom - With a business license, there are very few guidelines to follow. You don’t have adhere to a parent company’s corporate policies or marketing strategies. Develop your own niche instead.
- No brand recognition - Licensed business don’t have the kind of brand recognition franchises have earned. In some cases, there’s not even a shared brand name. You’ll have to work hard to build name recognition for your business.
- Lack of support - After you purchase the license, you’re pretty much on your own. There’s no parent company to guide you through business decisions or offer advice and support.
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