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?
Goals in the far future can generally be classified more as dreams. Like most people I wish to have a long, healthy and productive life with enough income to sustain my lifestyle in retirement.
My parents are well into their 80’s and still live in their own house rather than in one of those senior care facilities. They have slowed down somewhat but still enjoy many activities.
My Long Term Goals and Retirement Plan
I feel that I should have at least 30+ years ahead of me to enjoy my leisure time. Being mortgage and debt free, I believe that I can live decently on $3000 to $4000 a month. My proposed income, subject to future revision if necessary, will be as follows:
1. Until I’m 65 I will start making withdrawals from my RRSP. I will take the bonds and mutual funds first as they are not really income producing. As long as the market doesn’t take a sudden downturn I will take my profits. Then I’ll take the paid dividends and finally I’ll liquidate the stocks. As I probably won’t have any other income at this time, withdrawing the RRSP will reduce income taxes.
2. At the standard retirement age of 65 I should be eligible for OAS and GIS and provincial allowance and I’ll receive funds from a small defined contribution plan.
3. I plan to wait until I’m 70 to apply for CPP in order to receive a larger payment.
4. I will still have my TFSA and non-registered portfolio. I can rely on my dividends, or do a systematic withdrawal depending on how much money I need and what the balances of the accounts are.
This is the tentative retirement plan subject of course to all the unknown variables of inflation, rate of return, cost of living, health, leisure activities and longevity. In the worst case scenario, if I run out of money, I can always appear on my son’s doorstep with suitcases in hand and cats under my arms 🙂
I’ve written a little bit about my investment strategy and my goals to replace employment income with dividends over time. I wanted to further elaborate my retirement plan and explain how I hope to retire early and live comfortably.
When I retire, I will have 3 main sources of income. A defined benefit plan, RRSP and TFSA. Let’s take a look at each of these income streams:
- Defined Benefit Pension – When I started my current job, I began contributing to a defined benefit pension plan. My contributions are set at 11.5% of my salary, and my employer matches the contributions. This will obviously be our main source of retirement income, however if I retire early I will miss out on the full value of this pension
- RRSP – Before I started my new job, I didn’t have the luxury of a defined benefit pension so I contributed to my RRSP. While I don’t plan on contributing much more to my RRSP in the future, I have already built up about $40,000 worth of dividend growth stocks, REIT’s, and Income Trusts. Since I contributed to this account early in my 20’s, the portfolio value should continue to grow over time.
- TFSA – I also have dividend paying equities in my TFSA. I plan on maxing out my contributions annually, and re-investing the dividends whenever appropriate (I don’t use a DRIP).
So here’s the plan, assuming I retire early at age 55:
- RRSP portfolio is worth $365,000 and paying $23,000 in dividends annually (assuming 5% dividend growth annually and re-invested when cash equals $3,000)
- TFSA portfolio is worth $540,000 and paying $31,000 in dividends annually (assuming 5% dividend growth annually and re-invested when cash equals $3,000)
- Defined Benefit Pension would pay me a bridge benefit of $13,440 ($1120/month) from age 55-64, and then the full pension would kick in at age 65. Based on 25 years of service, my annual pension would be $62,400 ($5200/month).
We couldn’t survive on $1120/month, so we would meltdown the RRSP over the next 10 years. I’ve estimated our withdrawals at $44,000 per year. With the RRSP income and the bridge benefit, would be living on about $40,000 per year after taxes.
While that doesn’t sound like a lot, we wouldn’t have a mortgage or any other debts, and the kids would have moved out by then. Besides, we haven’t even talked about using our Tax Free Savings Account in retirement yet. This should add another income stream and safety net.
At the standard retirement age of 65, we begin to collect the full pension at $5200/month. At this time, our TFSA has grown to over $1.2M and is producing $90,000 in dividends annually. Sounds comfortable to me…
Now I’m making a lot of assumptions here, but who isn’t when they’re talking about 25 years down the road? Whether I retire at 45, 55 or 65, I still like to have a plan for the future and know that we are on the right track towards our financial freedom.