‘Cheap’ Franchises Can Cost Big Bucks

Much like with any other investment, if a franchise opportunity looks too good to be true, it just may be. Many franchises are relatively cheap to buy with …

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Much like with any other investment, if a franchise opportunity looks too good to be true, it just may be. Many franchises are relatively cheap to buy with regard to the buy-in and franchise fees, but this cost often stands in stark contrast to the investment it takes to get make it operate at a profit. Experts point out that home-based franchises are a good alternative to traditional brick-and-mortar businesses, although there are some that have comfortable investment-to-profit ratios. A few franchises that require less than $20,000 in starting costs that can turn a respectable profit include Nathan’s Famous (hot dogs), The Grout Medic, Papa John’s and Liberty Pest Management Services. For more on this continue reading the following article from TheStreet.

Many franchised companies tout affordable start-up costs, but new franchisees should be careful of the difference between franchise fees and how much it may actually cost to get the business truly up and running.

Even with signs companies are starting to hire again, many entrepreneurs are turning to franchising as an alternative to corporate America.

Concepts that don’t require a lot of money to establish, such as home-based businesses, are particularly popular.

"We expect the interest on lower-cost franchises to remain high in 2012," says Franchise Gator‘s general manager, Farrah Kennedy. "While a lot of these franchises are not as sexy as the more expensive food or retail, they often have better margins and allow for a great work-life balance. For someone just starting out on their entrepreneurial journey, these can be a great starting point to learn the ins and outs of running a business, manage employees, etc., and good income for a sole proprietor."

Besides home-based businesses, there are many franchises with more than one type of store or concept available for sale — for varying start-up costs. But new investors and franchisees need to watch out for the difference between initial franchise fees and the total investment needed to get the business properly running.

The start-up expense is the amount of money required for a franchisee to open and operate a location for at least three months. That may not be reflective of the total investment required, though, which includes such things as real estate leases, operating capital and marketing costs.

It’s also important to match a proprietor’s risk level and cash and financing availability to an appropriate concept. (Most franchises have a minimum net worth requirement and liquid asset requirement for new franchisees.)

Potential franchisees shouldn’t just jump into any name. Just because the company may have low start-up costs doesn’t mean they are reputable. Before putting down money, franchisees should make sure the company has a "proven system" that has been easily replicated and successful in different scenarios, Kennedy says.

"A franchise is not a guarantee of success, so make sure you can bear the risk," she says.

If you are an existing operator or can be extremely frugal, these five companies are reputable and require less than $20,000 to get started, according to the International Franchise Association. 

1. Nathan’s Famous
Start-up minimum: $10,350
Getting to hang a Nathan’s Famous(NATH) sign on your door requires as little as $10,350, according to the company. Nathan’s highlights that it offers flexible menus and designs, including a variety of concepts available under its name for new and existing restaurants, movie theaters, convenience stores, casinos, mass retailers and stadiums — not just stand-alone stores.

As of December, the Nathan’s restaurant system had approximately 302 units (297 franchised and five company-owned). The company says the least expensive option for franchisees its "branded menu" program.

"For someone who wants to offer the true Nathan’s experience but does not have the space or ability to develop a full-menu Nathan’s Restaurant, the branded menu program is an ideal opportunity," the company says. The program essentially allows an existing food service operator to add Nathan’s products, including hot dogs, hamburgers, corn dogs, crinkle-cut french fries and chicken tenders, and cook them on their own equipment (so long as approved by the company).

The price includes the license fee and a menu board. Under the program, the operator can use Nathan’s trademarks, paper goods, marketing material and point-of-sale materials, according to promotional material about the branded menu program.

New food service vendors can also buy in, but the equipment purchase alone — around $25,000 — not to mention construction and ancillary costs, will make the start-up costs significantly higher. Vendors could pay a range, maxing out at $71,700. 

2. The Grout Medic
Start-up minimum: $13,800
Steven Seabaugh, director of franchise development for tile and grout specialist The Grout Medic says for $13,800 an entrepreneur can get everything needed to buy a franchise, including tools, equipment, inventory and magnetic signage for vehicles.

But when all is said and done, Seabaugh says it will be more like $30,000.

On top of the franchise fees and training, new franchisees should allot about $2,000 for hotel, airline and spending during their week of training, $2,000 for office furniture, about $3,000 if they decide to finance a new car, $3,000 for operating capital and $6,000 for the first three months of local marketing, he says.

"You can be frugal and do it for under $30,000 … but for $30,000 I feel extremely comfortable in talking to people about having a start-up," Seabaugh says.

The company emphasizes how quickly new franchisees take appointments — after their week of training, upon returning to their territory, appointments have already been set up for them. "The very next week you can go out and start generating income," he says.

Grout Medic has about 35 franchisees, who are allowed to own more than one territory. 

3. Papa John’s
Start-up minimum: $15,000
With more than 3,400 restaurants, Papa John’s (PZZA) doesn’t seem like the typical company that might have franchises available for low costs. According to the IFA, though, start-up can be as low as $15,000.

Besides traditional stores, the company offers what it calls "nontraditional locations" such as sites at universities, airports, military bases, stadiums, theme parks, amphitheaters and convenience stores.

The franchise fee for a nontraditional location is $5,000 per unit, far less than the $25,000 for a stand-alone store. While monthly royalty fees of 5% stay the same, monthly marketing contributions are only about one-quarter of the normal payments for nontraditional locations. Still the total estimated initial investment required for a nontraditional restaurant ranges from about $56,850 to $260,000, according to Papa John’s Web site.

This year though, Papa John’s is also promoting its 2012 U.S. Development Incentive Program, according to the Web site. Approved franchisees can take advantage of a waived franchise fee, up to $50,000 in free equipment and zero royalty payments until June 2013, the company says. 

4. Liberty Pest Management Services
Start-up minimum: $16,000
Liberty Pest Management Services, which — as the name suggests, takes care of pest and animal control — has drawn 11 franchisees in two years. Liberty Pest provides these services in New York, New Jersey and Florida. Franchisees are primarily home-based (or truck based).

According to the IFA data, start-up costs range from $16,000 to $40,000, while a total initial investment ranges from $21,400 to $74,500. Co-founder Todd Oifer confirmed the IFA’s figures but says the company is trying to be as flexible as possible to franchisees. Besides offering discounts to veterans, for instance, Oifer says experienced candidates (such as those coming from a competitor) could get some of the franchise fee — or all of it — waived.

Fees also depend on the state’s licensing requirements, he adds. Start-up fees include a protected territory and exclusive branding rights, discounts to vendors, suppliers as well as training on industry protocol.

Start-up costs also vary depending on whether the franchisee already owns equipment and a vehicle and on the menu of services they choose to offer. Ongoing investments include royalties (built on a declining scale depending on gross revenue), licensing fees and insurance, for instance.

"We attempted to create the most flexible pest control franchise system available," Oifer says. "We’re basically targeting marketing to technicians and salespeople in the industry who always dreamed about having their own business." 

5. Candy Bouquet
Start-up minimum: $8,500
Candy Bouquet prides itself not only on having gourmet chocolates in its candy arrangements, but on being a true small business with low start-up costs — according to the IFA, as little as $8,500 to $36,000. The total initial investment ranges from $10,220 to $46,600.

Included in the franchise fee, which can start at $7,000, is training on how to create the bouquets, how to design a showroom and how to manage the storefront or home-based business, according to the company’s Web site.

Chief Operations Officer Jim Benham says a few things come into play when deciding start-up costs.

"We base our franchising fees on populations of ZIP codes. ZIP codes are exclusive territory for franchisees. They own those exclusive territories for active marketing purposes. So it’s a sliding scale based on populations," he says.

Another thing that comes into play: Whether a franchisee is buying a single or multiple territories. Overhead expenses will also depend on whether they are going to be home-based or a storefront (many of Candy Bouquet’s franchisees already own existing stores, such as flower shops and candy shops).

New franchisees must also pay for inventory. Roughly $4,000 of inventory should make about 200 bouquets.

The company has between 350 and 400 active franchisees.

This article was republished with permission from TheStreet.

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