The Cost Of Starting A Franchise
Have you ever looked at the line-up of cars waiting in a Tim Horton’s drive-thru and thought, “Is this place just a license to print money?” I’ve often wondered about the cost of starting a franchise, and whether or not the initial capital investment and time involved would be worthwhile.
I’ve researched some of the top franchises in Canada and the results were quite surprising. Here is a list of popular franchises and how much they typically cost to open:
Starting a Franchise
1. McDonald’s – Serves more than 56 million customers a day with over 30,000 locations in 118 countries. More than 70 percent of McDonald’s restaurants are owned and operated by local business people. 20-40 employees are needed to run a franchised unit. 82 percent of franchisees own more than one unit. Absentee ownership is not allowed.
- Total Investment: $950,200-$1,800,000
- Initial Franchise Fee: $45,000
- Royalty Fee: 12.5%+
- Advertising Fee: N/A
- Term of Agreement: 20 years
- Renewal Fee: $45K
- Minimum Financial Requirements: New owner must pay 40 percent (cash) of total investment
2. Tim Horton’s – With more than 2,800 locations across Canada and 500 in the United States, Tim Horton’s is a national icon. The Canadian operation is about 95 percent franchise owned and operated. 25-30 employees are needed to run a franchised unit. 58 percent of all franchisees own more than one unit. Absentee ownership is not allowed.
- Total Investment: $409,200-$665,700
- Initial Franchise Fee: $35,000
- Royalty Fee: 2.5% to 4.5 %
- Advertising Fee: 4%
- Term of Agreement: 10 years
- Minimum Financial Requirements: New owner must pay $144k (cash) of total investment, plus have $50k (cash) in working capital available
3. Subway – Operating 33,538 restaurants in 92 countries, Subway is the world’s largest restaurant chain. 6-10 employees are needed to run a franchised unit. 65 percent of all franchisees own more than one unit. Absentee ownership is not allowed.
- Total Investment: $78,600-$238,300
- Initial Franchise Fee: $15,000
- Royalty Fee: 8%
- Advertising Fee: N/A
- Term of Agreement: 20 years
4. Domino’s Pizza – Over 8,600 stores in 55 countries, Domino’s is one of the world’s leaders in pizza delivery. 15-20 employees are needed to run a franchised unit. Absentee ownership is not allowed.
- Total Investment: $119,950-$461,700
- Initial Franchise Fee: $3,300
- Royalty Fee: 5.5%
- Advertising Fee: N/A
- Term of Agreement: 10 years
- Minimum Financial Requirements: $50k liquid assets, and must have successfully managed a store for at least one year
5. Booster Juice – With over 170 stores in just 7 years, Booster Juice is the fastest growing juice bar in Canada. 8-10 employees are needed to run a franchised unit. 10 percent of all franchisees own more than one unit, however they are required to buy multiple units/master licenses. Absentee ownership is allowed, but 95 percent of franchisees are owner/operators.
- Total Investment: $214,500-$244,500
- Initial Franchise Fee: $20,000
- Royalty Fee: 6%
- Advertising Fee: N/A
- Term of Agreement: 5-10 years
- Renewal Fee: $5K
- Minimum Financial Requirements: $350k Net Worth and $100k liquid assets
As you can see, most franchises have a very strict selection process for accepting new franchisees. That’s not surprising, considering that when starting a franchise with one of the top franchises in Canada they want to ensure you are committed to the keeping the integrity of their brand to the highest level.
What was surprising to me was how much cash was needed to fund the initial investment. I had a pretty good idea of how much franchise fees were, but the amount of liquid capital needed when starting a franchise is huge.
Related: Preparing Yourself Financially Before Starting A Business
Starting a Franchise – Best Value
From this list, I view Subway as the best value for someone looking at starting a franchise in the fast food sector. For a minimum of $78,000 plus the $15,000 franchise fee, you can have one of the most recognized restaurant brands in the world. They didn’t have any outrageous personal financial requirements, as you could access traditional methods of financing to fund the investment without having to pay a large portion out of your own pocket.
Personally, operating a restaurant franchise is not high on my wish list. The financial reward might be worth it in the end, but at the cost of the majority of your time. I would much rather let my dividend income work for me over time. Tim Horton’s may be a license to print money, but I’m not buying it.
Would you consider starting a franchise?
Thank you for providing a concise overview of these top ” INBOUND RETAIL” food franchise opportunities (where location and marketing are the key drivers of the business). Most of our clients share your sentiments regarding restaurant ownership – that’s not high on thier lists either.
Franchising in Canada is arguably the most dominant form of successful business ownership, but more than 50 % of all franchise systems are not in the food or retail space; per capita, Canada is one of the world’s most franchised contries.I operate one of North America’s most successful franchise matchmaking companies; most of our clients are mid & senior-level executives who want to leverage their corporate skills and experience in business ownership. B2B and B2C service-based buseinesses are where they end up – these businesses are far less expensive to buy and launch ($50k 0 $200k including working capital), and in many cases provide greater profitability than many of the food franchises.
With such a broad title for theis article, it would be great to see more categories of franchise opportunities listed. I welcome the opportunity to discuss tyhis with you.
Successfully,
Gary Prenevost
Pesident, FranNet of Southern Ontario
I think people misunderstand the franchise system. Like you said, we all view Tim Hortons as a “printing machine” but you have to consider all the hidden cost, like rent, utilities, insurance, etc. If you want to start a successful business, you have to ask your self what is working in this market, what do people want to buy. In the food industries people want something fresh and fast. So if somebody opens a restaurant that offers both but that is not a franchise, s/he can still be very successful and maybe even do more money since s/he won’t have to pay royalty fees to the franchisor. You just need to find the right concept like the MTY group did with Thai Express and Sushi Shop.
Sarah, you make some important points, especially about what’s working in your market and what people want to buy. Among a host of other things, a would-be entrepreneur though has to also consider what short-term and long-term factors are present to drive their desired business – is it a TREND or a FAD? a lot of money can be made in a fad-based business, but as we’ve seen with many businesses, fad-based franchises expand rapidly then disappear rapidly (just think of the bagel business in the 1990’s). Trend-based businesses might not expand as fast but they are far more sustainable; the more trends there are behind a business, the stronger and more sustainable that business is likely to be. We recommend businesses to our clients where at least two or three trends support the business; some of these current trends are 1) aging population; 2) convenience services (we’re in such a time-starved society), and 3) healthier living.
One final comment – while the franchisee has to pay royalties where the independent business owner does not, in most cases of a well-run franchise system, the amount of royalties that the franchisee pays provides tremendous value, both in terms of reduced risk and in terms of ongoing support to run their business effectively.
Approximately 90% of all “start-from-scratch” businesses fail within the first five years, while only approximately 15% of franchised businesses fail in that same time period, so the risk of buying a franchised business is significantly lower than starting out on your own. The franchisee enjoys the benefit of working from a proven system thus they avoid costly mistakes and focus on proven activities that drive success (instead of having to figure everything out on their own); they also have ongoing direct support of their franchisor and the other franchisees who are doing what they do, day in and day out, while the independent owner has little to no support network.
@ Gary
thanks for your comments. In my previous career in hospitality, the same argument was made for branded hotels vs. independent hotels. Sometimes owners just look at the royalty payments, but often times overlook the benefits of the brand, such as marketing & advertising, a regional or national sales team, toll free reservations and website support, etc. The power of a great franchise or brand behind you can drive sales in a way that you just can’t match on your own.
Some great point being discussed. I am interested to find out for the canadaian market if food is not a high demand area in franchising then which other types of businesses are in demand from a franchising point of view?