Costs to Franchise Your Business
Franchise costs will vary based upon a number of factors such as your existing franchise assets (i.e., trademarks, patents, operations manuals, or other proprietary material ) and franchise suppliers, etc.
Outlined below are the estimated costs associated with franchising a business.
Entity Formation Generally, it is a good idea to form a separate legal entity - one that is distinct from the entity that owns the corporate stores. This is important to help shield the parent company or initial entity from liability and to protect its assets. In addition, creating a separate entity will help to minimize your audit costs. You should also consider creating a holding company that will own the intellectual property. The cost associated with forming these entities will depend on the state of formation, the number of owners, and your governance documentation (i.e., operating agreement, partnership agreement, etc.). Generally, these costs can run anywhere between $1,500 to $10,000.
Franchise Disclosure Document (FDD) The FDD is a legal document that franchisors are required to provide to franchisees before they invest. The FDD outlines 23 items that must be disclosed to franchisees including the history of the company, fees, and the legal relationship . To learn more about the FDD and its requirements read What is the Franchise Disclosure Document? The cost associated with drafting the FDD is generally offered at a flat fee and can range from $20,000 to $40,000. You should hire a lawyer to complete the FDD.
Intellectual Property (IP) One of your primary roles as the franchisor will be to grant licenses for the use your IP. IP includes things like your trademarks, patents, your business systems, trade secrets, and other proprietary products or information. Your IP is probably your most valuable asset(s) as it is likely the part of your business that is your revenue generator. For some, without the IP, they have no business. This being the case, you will want to ensure that it is protected. If your IP has not been registered, you should register immediately, if applicable. Copyright registrations will generally start around $500; Trademark registrations between $1,500 to $3,500; and Patent registrations $7,000 - $15,000.
Operations Manual Your franchise operations manual is the blueprint and how-to guide for your franchise. It should contain the systems and standards of the business (including a description of the policies and procedures of the franchised business as well as a list of approved suppliers). The primary purpose of the operations manual is to organize, document, and communicate the operational requirements, systems, and procedures for franchisee training and the establishing and running the franchised business. The costs associated with the creation of your manual will depend on the method you choose (e.g., buy a template or outsource the drafting) and generally range from $0 to $30,000.
Audited Financial Statements Franchisors are required to disclose audited multi-year financial statements; there is an exception for a franchisor for their first year offering franchises which allows them to use unaudited financial statements. Note: California, Minnesota, New York, and Virginia do not accept unaudited statements. If you’re going to sell your franchise in these states, you will be required to have the opening balance sheet audited, which for a new franchisor entity, will cost between $1,500 to $4,000.
Website You will need a separate website or portion on your current website that provides information about the franchise opportunity. This information should include information such as a prospective franchisee's required qualifications, investment required, etc. The associated costs will depend on whether you will modify your current website or create a new website and can start as low as $2,000.
State Registrations Many states have additional compliance requirements for selling franchises in the state. 14 states (California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin) require you to register your FDD before you can sell a franchise in the state. There are four states (Connecticut, Kentucky, Nebraska, and Texas) that require a one-time business opportunity exemption to be filed. And, there are two states (Florida and Utah) which require that annual business opportunity exemptions be filed by franchisors. Registration fees for these states range from $25 to $750 and legal fees can range from $750 to $4,000 per state.
If you are interested in franchising your business, schedule your legal consultation today. Cooper Legal is happy to assist.