How Much Does It Cost To Franchise A Business In California?


Independent businesses weighing their options for growth and expansion would be reluctant not to explore franchising as a means of scaling up their concept.

That said, franchising is not a realistic means of expansion for every industry. Before diving in, entrepreneurs interested in dipping their toes in the franchise waters should consider several key factors.

To this point, in this article, we will be discussing the necessity of franchising for businesses and later on move on to discussing the cost of turning business to franchise.

Lastly, we are going to explicitly discuss the numbers and answer the question of how much does it cost to franchise your business in California.

Why Franchise Your Business?

Before talking about the true cost of turning your business into a franchise, let’s talk about why one must franchise their business.

Companies, in general, decide to start franchising for one of three reasons: lack of money, people, or time.

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The primary barrier to expansion that today’s businessman is facing is lack of capital.

And franchising allows companies to grow without the possibility of debt or equity costs.

Since franchisees provide the initial investment at the unit level, franchising allows the franchisor to grow with minimal capital investment on their own part.

However, since it is the franchisee, not the franchisor, that signs the lease and agrees to specific service contracts, franchising allows for growth with almost no contractual liability, thus significantly minimizing the risk of a franchisor.

The second barrier to expansion is to find and retain good heads of units.

All too often, a business owner spends months searching for and training a new manager only to see that manager leaving — or worse still, being hired away by a competitor.

Franchising helps companies to solve all of these issues by replacing a unit manager with a driven franchisee.

Interestingly enough, since the franchisee has an interest in both the product and a share in the profits, the efficiency of the product will also increase.

And because the income of a franchisor is dependent on the gross sales of the franchisee, and not profitability-monitoring, unit-level expenditures of the franchisee is considerably less tedious.

It takes time to open another venue, at last; Hunting places; Discuss and Negotiate leases; Arrange for design and execution; Guaranteed funding; Hire staff, and educate them; Purchasing machinery, and stock.

The end result is that in any given period of time, the number of units that you can open is restricted by the amount of time it takes to do it properly.

Franchising is also the quickest way to develop for companies with too little time (or too little staff).

That is because most of those growth tasks are performed by the franchisor.

Of course, the franchisor provides guidance, but the franchisee is the one doing the legwork.

Franchising thus not only provides financial flexibility for the franchisor but also helps them to exploit their resources.

Can Your Business Be Franchised?

Franchising is a relatively flexible format and just about any type of business can be franchised, provided that it meets certain basic features:

  • It needs to be credible. Is there experienced management executing your business? Do you own a track-record over time? Is the concept proven by authorities? Have you managed to receive strong local press or public acclaim?
  • It has got to be original. Does your business differentiate adequately from its competitors? Is your concept marketable as an opportunity for business? Will it provide a sustainable competitive advantage?
  • It must be teachable. Are you sure that the systems are in place? Have the operating procedures been documented? Could anyone learn how to run your company in three months or less?
  • It needs to deliver a strong return. This is not just referring to profitability. If a business can not generate a return on investment of 15 to 20 percent after deducting a royalty (typically between 4 and 8 percent), then it will be facing difficulties in keeping the franchisees happy.

If your business follows these conditions, then it might be a good option for franchising.

Once a company makes a franchise decision, it needs to create a sound expansion strategy in the first place.

This plan must take into account the many challenges a new franchisor faces: speed of growth, territorial development, support services, staffing and fee structure, to name just a few of the most important issues.

Larger companies need to address more complex issues such as channel conflict, antitrust issues, and allocation of resources.

And certainly, all of your plans need to be subjected to thorough financial review and evaluation in order to fine-tune your growth strategy.

Once you have your plan in place, you will need to provide the proper legal paperwork.

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You would at least need a franchise contract, a circular offer (as required by FTC Rule 436), and state registrations, depending on where franchises are being sold.

In a good franchise agreement, there are literally hundreds of different business issues that need to be addressed and the decisions made on these issues will ultimately dictate your success as a franchisee.

For a new franchisor, quality control involves the development of highly developed systems.

In general, this translates into the development of an operations manual which must contain not only the systems used by the company but also the checklists, policies, procedures, and tactics that will enable the uniform enforcement of such systems.

In addition, operations manuals have to be vigilant to avoid creating an entity and also fix problems that might generate negligence lawsuits if you want to retain effective protection against consumer liability.

Finally, as a new franchisor, you need to develop the franchise marketing and selling capability.

That requires knowledge of how to attract prospective buyers and the materials needed (brochures, mini-brochures, videotapes, DVDs, etc.) to help make and improve the sale.

In addition, given that the franchise sales process is highly regulated, you will need to be educated in proper sales, disclosure, and compliance technics.

The True Cost Of Turning Your Business Into A Franchise

Now that we know why to franchise a business and what businesses have the capacity to be franchised, let’s move to the true cost of turning your business into a franchise.

You will receive a franchise fee when you sell a franchise but after all your expenses you will not retain much of that fee.

You are really making money out of the ongoing royalties.

That is where choosing the right person to be your franchisee is crucial.

Similar to selecting a good business partner, you need to be able to trust that person to run a company efficiently and to work well with you.

If you allow your company to be franchised by the wrong person you may lose money and the good reputation of your company.

Consider hiring a consultant after you decide that franchising is the direction you want to take.

Managing and running franchises is very different from being a business owner-operator.

Legally and financially, this is a complicated operation, so you will want support from someone who is already an expert.

Who Pays For What?

At first, it might be difficult to fully understand the expenses as the franchisor and what the franchisee would be paying for themselves.

Here is a quick summary of who pays for what:

The Franchisor Will Cover:

  • Marketing Materials And Collateral: You need to draw franchise investors, create a cohesive handbook for your franchisee, and announce your community that a new location will open once all is settled. It could cost a few thousand dollars, depending on your own skill level versus hiring experts to help.
  • Training And Supporting Your Franchisee: You want to retain quality control and the integrity of your company, so you will need to spend a large amount of your time training them and helping them while the franchise is open. You may also need to pay current employees to mentor and train future employees for the new location.
  • Hiring A Franchise Lawyer: Hiring a professional lawyer will cost you more than $25,000 to set up the franchise and hold it in retention for at least a few years. You might need to restructure your company. Given the incredibly complicated laws and taxes surrounding franchises, this is a step you should not skip unless you yourself have a background in law.
  • Legal And Regulatory Fees: You will have annual expenses in addition to filing the initial paperwork with the attorney general of your state – which can vary from $1,000 to $2,000 depending on where you are based. For franchising, the FTC needs a lot of compliance. For a guide on how to comply, look here.
  • Taxes And Audits: Taxes are never a fun or simple concept, especially if you have a business and are planning to make changes. Franchised companies will be audited quarterly, and the accountant fees are likely to increase, as well as potentially thousands of dollars in extra taxes. For more information, see your state’s Franchise Tax Board.

The Franchisee Will Cover:

  • Initial Franchise Fee: When you sell a franchise, you will charge the franchisee a fee (which averages around $30,000 and will go towards helping you cover all your initial costs).
  • Real Estate: While you may want to help choose the location of the new franchise, the franchisee usually pays for all real estate and associated expenses including insurance, leasing, property taxes, repairs, etc.
  • Startup Costs And Working Capital: You should not spend any of those when it comes to all the normal costs associated with starting a company. The franchisee pays all the expenses in order to hire and train new employees, decorations not already provided by you (according to your guideline you will have to create), inventory, taxes, payroll, and more. You have started a small business of your own in the past, you are familiar with these costs like the back of your hand.
  • Ongoing Royalties: This is where you pay for all of your expenses and continue making a profit on your growth. Carefully calculate the percentage you will charge, as the difference between 5 percent and 6 percent will add up to the missed profits over time.

How Much Does It Cost To Franchise Your Business In California?

The cost of turning business to a franchise is usually less than most business owners assume.

In reality, the cost of turning your company into a franchise is almost always lower than the cost of opening another corporate location.

Now that we covered all the necessary information about franchising, let’s talk about how much does it cost to franchise your business in California.

California Franchise Law

California is a franchise registration state. Under the Franchise Investment Act of California, franchisors are expected to file their FDD with the California Department of Business Oversight.

The initial registration fee for the FDD is $675, and a renewal fee for the FDD is $450. Registration expires 110 days after the end of the franchisor’s fiscal year, and annual renewal is required.

Under California law, what qualifies as a “franchise” is broadly defined to include all written or oral agreements where:

  • An individual, referred to as a franchisee, has the right to sell or distribute goods or services under a “marketing plan or system”
  • The activity of the franchisee’s business is significantly related to or defined by the brand of the franchisor, and
  • The franchisor is expected to pay a franchise fee for the right to enter the partnership.

California law generally describes what constitutes a franchise fee which includes reimbursement for goods and services.

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