Investing in a franchise is a good option for investors who are looking for a lower-risk project or who want to minimize uncertainty. So what is the cost to open a franchise, and more importantly, how do the returns measure up when compared with creating a new business from scratch?
Costs and returns will vary depending on several factors, including:
- Whether your goal is a single-unit concept or a multi-unit franchise spread over a wider region.
- The operational model of your business, including locations and staff.
- The complexity of the business and the level of support a country-wide franchisee needs to give to its local network.
When considering owning a franchised business, entry and operational costs should be weighed against ROI. Read on to learn more about how these three variables influence your decision.
- Cost of Setting Up a Franchise
What costs are involved when investing in a franchise? There are several variables associated with setting up a franchise, including franchise fees, build-out and launch costs.
- Franchise Initial Fees
The franchise fee is typically a one-time entry fee giving you access to the franchise network. It will also usually provide you launch assistance, as well as ongoing support and training.
According to franchising.com, initial franchise fees usually fall in the USD 20,000 to 30,000 range, although for more established brands that price can go as high as USD 100,000. For example the market-leading franchise in English training, Wall Street English, fees range between USD 12,500 for a small center to USD 50,000 for a large one.
- Center Build-Out Fees
If a physical setting for the business is needed, you will encounter center build-out fees. Franchise companies typically have brand guidelines when it comes to construction to ensure brand consistency across all locations.
These build-out costs will vary depending on several factors and will typically include furniture, equipment, signage, and other professional fees, like architects and builders. For a small, nonspecialized unit, the price might be around USD 50,000, while for a high-class restaurant the cost could rise to USD 1 to 2 million.
In the example of Wall Street English, since 2020 the organization has adapted its center layout model to enable learners to choose between learning English in its centers, online, or both. A consequence of this is that unit sizes and the capital required to lease and build them out have been reduced.
With an average center size of around 250 square meters (the largest being around 350 square meters), an overall build-out fee of this new center concept could range from USD 50,000 to 200,000.
- Launch Costs
The launch costs are the inevitable costs of starting a business, whether it is a franchise or a new startup. They include recruitment, systems setup, licenses, initial marketing campaigns, and legal and financial fees. When it comes to launch costs, investors should look for a tried-and-tested, systematic concept which allows a smooth launch and rapid growth.
Recently, Wall Street English has introduced a suite of systems that includes a custom-built CRM and an upgrade to its proprietary learner management system — all with the purpose of creating a plug-and-play business allowing a smooth launch and quick ramp-up to start delivering returns on that initial investment.
- Bringing it All Together
According to franchising industry expert Michael H. Seid, founder and managing director of MSA Worldwide, the initial investment for a single unit franchise when all these factors are taken together — in other words, the total cost to open a franchise — typically falls in the $100,000 to $300,000 range.
At Wall Street English, the cost of entry typically starts at $150,000. This depends on the specific market, the speed of ramp-up, and the potential scale of the business.
Costs Involved in Running a Franchise
Once your franchise is set up, you will need to think about the costs associated with running the business, including ongoing franchising fees and the costs of day-to-day operations.
- Franchise Ongoing Fees
Once the business is up and running, there are typically royalties to pay, which are normally based on gross revenue. According to franchising.com, these fees typically range from 6% to 12%. At Wall Street English, these fees are performance-based and typically set at the lower end of this range, with incentives for accelerated development.
- Service Fees
When investing in a retail franchise or any type of business selling physical products, you have to consider inventory as a significant startup cost. Don Daszkowski, CEO and Founder of the International Franchise Professionals Group (IFPG), says you’ll likely be required to buy between USD 20,000 and USD 150,000 worth of inventory.
If a franchise delivers services rather than products, fees are usually applied to access the service offered to the end customer. For example, Wall Street English charges a technology fee for the learning platform and for digital course books used by the learners. These fees are proportional to levels of sales and usually total about 5% to 6% of revenues. In some education businesses, however, these “hidden” mandatory costs can exceed 20% of sales.
- Working Capital
Finally, you will need to be aware of working capital, the cash needed to cover day-to-day operations. According to Daszkowski, this should be calculated to cover a determined period of time, from two to three months up to two to three years, until the business is fully up and running.
Wall Street English supports future franchisees to build a business plan, adapt to local market conditions, including financial projections over five to seven years, in line with its franchise model and experience across 30 countries. Staff, leases, and marketing are the key cost blocks, representing on average 45% to 55% of the model.
Returns On Investment
Although initial investments and ongoing fees may seem high, entering a franchise system significantly reduces risk compared to starting a business from scratch, boosting your ROI.
Being part of a reputable franchise gives you access to a tried-and-tested business concept — including brand, processes, systems, and tools. You will also be connected to a network of other franchisees, easing the continued development of best practices.
You will benefit as well from the experience of the franchisor. Your franchisor can provide references and modeling around the cost of entry and running the business, as well as typical payback periods and profits. That is valuable information you simply won’t have at hand when starting your own business.
Due to its efficient operating concept, premium market positioning, and strong attainable market share, the Wall Street English franchise model delivers a quick payback on initial investment, typically within 18 to 24 months, and healthy ongoing margins. (Click here for further information on typical profits generated in your region.)
Why Choose Franchising
If you are looking to start up a business with low risk and fast scale-up, franchising is one of the best routes. It provides franchisees with a proven business model, standardized structures, optimized processes and systems, and support team bringing in value to the running of the business.
Even though initial investment can seem high when opening a franchise, a good franchise system typically offers faster returns on investment and quicker scalability than designing and launching a new enterprise.
Regarding Wall Street English, its franchise concept delivers more than just financial performance. It offers a highly cost-effective, blended-learning model designed to meet the needs of the contemporary consumer.
Through various improvements to the business model and service, the company has added additional revenue generators by reaching a broader addressable market, while reducing launch and operating costs, resulting in better ROI.
With the deployment of online learning in 2020, Wall Street English has continued to invest in its products and services, looking to the future. The company has evolved its franchise concept to be adaptable to uncertain times and to changing market conditions, making it an attractive proposition to investors looking to invest in education.