Earlier this year, Entrepreneur.com published a slideshow titled, “5 Affordable Franchises You Can Start for Less Than $10,000.” So, can you really buy a franchise for four figures? If so, is it a good idea?
How Much Does It Really Cost to Buy a Franchise?
It appears that the article’s figures are based on the franchisors’ initial investment estimates in Item 7 of the Franchise Disclosure Document (FDD). For example, the first slide shows an initial investment of $3,245 to $21,850 for the Dream Vacations franchise. So, right away, you can see that while it may be possible to start a franchise for less than $10,000, it is also possible to spend twice that amount, if not more. As we often tell prospective franchisees, when reviewing the estimates in Item 7, it is generally best to assume that you will not be at the bottom of the estimated range.
The second slide shows an even greater range of potential startup costs. For the Buildingstars commercial cleaning franchise, Entrenrepeur.com quotes the estimated initial investment at $2,245 to $53,200. In fact, among the five franchises you can start “for less than $10,000,” the lowest high-end initial investment is $17,000.
Even so, $17,000 is still a fairly modest investment for purchasing a franchise (on the high end, the initial investments for hotel and restaurant franchises can easily range into the millions of dollars). So, is buying a “cheap” franchise a good idea, or are there hidden risks involved?
Considerations for Buying a “Cheap” Franchise
Broadly speaking, buying an inexpensive franchise involves the same risks buying a franchise at any other price point. While the stakes might not be as high in strict financial terms, you can still lose your investment, and your franchisor is still going to put its financial interests before yours. Additionally, although the initial investment may be relatively low, between royalties, advertising fund contributions, business licenses, insurance, mandatory upgrades, salaries and other expenses, you could still end up investing substantially in your franchise opportunity. Furthermore, regardless of the amount of your initial investment, if your franchise gets sued, or if your franchisor comes after you for “lost future royalties,” you could face losses that far exceed what you put into the business.
As a result, when buying a franchise, it is important to do your research and make an informed decision regardless of the amount you expect to spend based on the Item 7 disclosures. For some tips on conducting your due diligence, you can read:
- 7 Essential Steps for Buying a Franchise
- Setting Reasonable Expectations as a Prospective Franchisee
- 6 Ways a Franchise Attorney Can Help Besides Reviewing Your FDD
- What are the Risks of Signing a Franchise Agreement Without Legal Advice?
- Franchise Fees, Royalties, Marketing Fund Contributions…How Much Does It Really Cost to Own a Franchise?
Inquire about Our Fixed-Fee Franchise Business Reviews
If you would like more information about the risks involved in buying a franchise, we encourage you to inquire about our fixed-fee franchise business review services. To discuss your legal needs with franchisee attorney Jeffrey M. Goldstein, call 202-293-3947 or request a free initial consultation online today.