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Buying A Franchise Can Sometimes Be Costly

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TWC News: Setting Up A New Franchise Can Sometimes Be Costly
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Opening any business is a major financial move, but with a franchise, you're looking at an array of startup costs and ongoing fees. NY1's Tara Lynn Wagner filed the following report.

Opening a franchise can be an expensive undertaking.

"You're looking at about $450,000," says Eugenia Tzoannopoulos, a franchise owner with Massage Envy.

"It's in the $300,000 range," says Brent Greenwood, manager of franchise development for Firehouse Subs.

"You could be looking at a few million, actually," says Sujatha Sebastian, director of BOC's Women's Business Center.

Sounds overwhelming, but it doesn't have to be. Jim Mastandrea, who directs several major franchise expos a year, says that startup costs run the gamut.

"The investment range could be as little as $5,000 to buy into a franchise opportunity," he says. "Could be as extensive as $5 million."

Part of that cost is the initial franchise fee, the amount of money you pay to the company up front to buy into the operation.

Beyond that, your costs will vary. A home-based business, for instance, may require little in terms of setup. The bigger the business, the longer the list.

"Insurance payments and down payments, a big marketing launch, we get you set up on our software," says Josh Cohen, CEO and founder of The Junkluggers.

Mix in real estate costs, operational costs and manufacturing costs, and the numbers can rise pretty quickly.

"The initial investment starts at about $800,000 for one of our factory stores, and that covers everything that you'd need to get your stores open, including the initial franchise fees, all of the equipment, the furnitures and fixtures," says Patricia Perry, vice president of U.S. franchise development for Krispy Kreme.

The costs don't end once your doors are open. Franchising is an ongoing relationship, with contracts as long as 20 years. During that time, you'll be making various regular payments to the company, starting with royalties.

"Four or 5 or 6 percent of your gross sales every month goes back to corporate," Mastandrea says. "That's their part of the deal."

There may also be a smaller cut, 2 or 3 percent, that goes to an advertising fund to offset the cost of local, regional and national advertising and build that all-important brand recognition.

"What that does is it really helps us get out into national publications, network television, Fox-TV, Food Network, CNN," Tzoannopoulos said.

In terms of financing, loans are available from the Small Business Administration and private lenders, and in some cases, the company itself. Many also offer discounted franchise fees to veterans to make business ownership more affordable.

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