January 10, 2023 | Last Updated on: April 15, 2024
If you are an entrepreneur and are interested in owning a small business, you may have considered buying a franchise. Rather than starting your own business without a corporate brand, you might consider a franchise option to be safer, easier, or better at providing more guidance in executing a successful business model. Indeed, a franchised business can offer these benefits without the headache of trying to take care of many business affairs by yourself. It can even provide unique funding opportunities in the form of franchise loans.
The customer bases for a franchised company are likely to be higher too. This is due to the name-brand recognition that many companies have. The high demand might allow your new business to achieve a substantial level of profit early on.
While a franchised business plan sounds great, you might still be concerned about the cost of opening one. Just as there are many plusses to a franchise agreement, there are also many drawbacks. Chief among these might be the cost involved with franchise costs. Especially if this would be your first venture as a business owner, you might want to be conservative and open up a low-cost franchise.
In this article, we examine the most profitable franchises with low upfront costs and widespread name recognition. That way, you can get a broad overview of the cheapest and most profitable margin franchises currently on the market.
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A low startup cost means that the initial investment required to establish the business is lower compared to other franchises. This can make the franchise opportunity more accessible to a wider range of potential franchisees and may indicate less financial risk associated with starting the business.
There are a few categories of startup costs to be aware of. The first is in the franchise fee. The franchise fee is a large upfront sum of money that you pay to the franchisor upon signing. It initiates the partnerships involved in the opening and continued operation of the business. This franchise fee usually starts as cheap as $10,000 and can climb into the several tens of thousands of dollars. This fee helps facilitate the initial marketing and training of your franchise, and it is also something that is used to help bring in revenue for the corporate franchisor.
You will also likely have to pay upfront inventory and materials fees from corporate. The extent of this requirement will depend on the policies of the franchisor that you ultimately select. Some types of equipment and brands of inventory will be required for you to have on hand.
Aside from the required corporate expenses for starting your business venture, you should also take into the other fixed costs of starting a business. As a future small business owner of a franchise, you will need to purchase or rent real estate for your franchise, decorate the franchise according to the franchise guidelines, and provide ample starting funds for labor, inventory, materials, and more.
As you can see, between corporate costs and fixed startup costs, there is quite a lot of potential variation. If those costs get too high, especially in the hundreds of thousands of dollars, starting a franchise might become inaccessible. That is why it is important to evaluate all of the possible startup costs for a franchise, and possible franchise financing options.
Once you have considered the startup cost of a potential franchise, it would also be wise to assess the profitability of such a business. One of the ways this can be done is by looking at the average net profit margin.
Net profit will vary between franchises for a variety of reasons. First, different franchises might be in different industries, which will cause the profit margin to differ. The standard for what a good profit margin is will depend on the franchise industry.
Another reason for profit margin variation is the general costs of a business. Since franchisors usually charge a royalty fee and advertising fee continuously for franchisees to operate a franchise, profit margins will also depend on these fees. Since they charge by percentage, the profit margin for a franchisee will likely depend on these fees.
Following this logic, an analysis of which franchise options have high profit margins allows you to glean which royalty or advertising fee levels may be worth it. For example, if a franchise charges high ongoing fees to operate a franchise, but its franchise owners consistently experience high profit margins, then a franchise might be worth the high ongoing fees.
You might also wonder about the effect of location, employees, or particular managers on the profit margins of franchises. One of the benefits of looking at the average profit margins for a franchise is that you can gain insight into the general performance of a type of franchise. If you can get more specific information about your region or likely operating situation, then that is of course beneficial information. However, the ultimate financial performance and margin for your franchise are dependent on your unique situation.
Now that you are aware of the importance of assessing a franchise’s potential startup cost and profit margins, it will be much easier to consider the return on your investment from these common successful franchises.
If you are a morning person, you may have heard of Dunkin’ Donuts before. Dunkin’ Donuts’ widespread popularity is the result of their famous, delicious coffee and donuts, spread across their franchises both in the US and internationally. They have established a widely recognized reputation, giving them credibility with potential franchisees. Indeed, their franchises can be opened for cheap.
If you are considering a franchise with a low startup cost and high profit margins, Dunkin’ Donuts may be for you. Dunkin’ Donuts has a reputation for having high profit margins among its franchisees. It is cheap to start a franchise location as well. The beginning franchise fee is only approximately $40,000-$90,000. The long term costs of a Dunkin’ Donuts are also not too high either. Royalty fees for a branch of Dunkin’ Donuts are between 2-6%, with advertising charges of only 5%. These cheap costs indicate that the portion of costs paid to corporate is quite small.
The overall investment in the startup cost of a Dunkin’ Donuts can be somewhat larger. Dunkin’ Donuts’ corporate offices estimate a wide range of potential costs, from between $500,000 to $1,787,000 for the total upfront investment cost.
Their franchisees are required to have $250,000 in liquid assets available to them. Net worth requirements are $500,000 per restaurant. It is important that you make sure that you meet these requirements before applying for a franchise of Dunkin’ Donuts. That way, you can be more successful in your application for a Dunkin’ Donuts location. Much will depend on the size of the Dunkin’ Donuts location you choose to start.
If you are passionate about fitness, Anytime Fitness might be the franchise for you. Many people are incredibly busy these days and the flexibility of a gym to be open at long hours is especially attractive to customers. Anytime Fitness has established a well-known brand catering to this need, providing its customer base with the flexibility to work out when they desire. This means that Anytime Fitness stays open 24 hours a day, 365 days a year.
Anytime Fitness has reputable high profit margins as well as low startup costs. The initial fee paid to Anytime Fitness ranges from $3,150 to $42,500. This is a very low franchise fee, providing potential franchisees a lot of flexibility to spend their money on investing in their franchise. Another piece of great news is that the ongoing fee is not based on a percentage of revenue against the business. Instead, there is a low monthly fee of approximately $700 assessed to franchises of Anytime Fitness.
Anytime Fitness estimates that the total investment for starting up your franchise would be between $380,000-$780,000. Considering all of the gym equipment that would be needed and the size of your franchise facility, this may not be that expensive of a startup cost.
It is important to note that you are also required to have a minimum net worth of $300,000 and $100,000 in liquid assets for your franchise application to be competitive.
Supercuts is a well-known hair-cutting salon and hair products store. It also has a reputation for having high profit margins and low startup costs. If you are interested in getting your own Supercuts franchise, you should have a net worth of at least $500,000 with liquid assets totaling $150,000 to be considered. The initial franchise fee is approximately $39,500. The total estimated cost of a Supercuts ranges from approximately $150,000 to $320,000 for startup costs.
If you are looking for a franchise in the retail store space, Ace Hardware might be a great fit for you. Especially if you love construction or DIY projects, Ace Hardware could be the perfect franchise for you.
Ace Hardware is known for low startup costs and low ongoing charges. If you are a veteran, their cost structure is even more affordable. Ace Hardware waives the initial franchise fee for veterans, making the cost to start up your Ace Hardware location even lower. The upfront fee is only $5,000 for a franchise otherwise. There are no royalty fees either. There are also high profit margins, on average.
There are some financial requirements about whether you decide to open an Ace Hardware location. Your minimum net worth needs to be $400,000. You should also have $650,000 in cash on hand.
Your total investment might be anywhere from approximately $280,000 to $1 million. There are also cheaper alternatives to a standard Ace Hardware store. You can also open a franchise of Ace Hardware in a store-within-a-store model. You may have seen this in grocery stores or other buildings, where a smaller Ace Hardware is contained within. In this case, the initial franchise fee is also waived.
This makes owning an Ace Hardware very flexible. Its costs are low and its potential for a high profit margin is quite high.
Chick-Fil-A is likely known by every American for its delicious and famous fried chicken, dipping sauces, chicken sandwiches, and long but well-managed drive-thru lines. It has become well-loved by local communities. As a potential franchisee, you may be considering Chick-Fil-A as a great franchise choice. Indeed, Americans love Chick-Fil-A, and the business model is well established with great sales and backing by a strong customer base.
Chick-Fil-A also has a famously difficult franchising process. If you are interested in applying for a Chick-Fil-A franchise, you should be prepared to deal with a selective recruitment process, which may not yield positive results. This is because Chick-Fil-A is careful to get a very dedicated franchisee who will drive their location to large profits.
Since Chick-Fil-A is so selective, they set their franchising fee only at $10,000 of capital. The commitment is financially very small for franchisees, especially as compared to fast food franchise standards. Moreover, Chick-Fil-A will help the franchisee by funding the equipment and construction of the franchised location. These are not completely free, however. The franchisee must lease it back from Chick-Fil-A. This is part of a somewhat complicated charge structure.
Chick-Fil-A leases all of its equipment and investment through a 15% royalty and a 50% split with the franchisee of the pre-tax margin. This is obviously a heavy cut of the ongoing revenue. This is an expensive ongoing cost, yet the startup cost is much lower.
If you are concerned about low startup costs, Chick-Fil-A might be perfect for you. Even though there is a substantial cut of the profits of the business taken by corporate Chick-Fil-A, it is still a very profitable business to run, with a reputation for high margins.
Jersey Mike’s is a rapidly growing American sandwich chain franchise. Jersey Mike’s prides itself on fresh ingredients and a tasty menu. Its rapid explosion in popularity has been, in part, due to the low startup costs and high profit margins of the brand.
As a franchisor, Jersey Mike’s makes starting a franchise cheap. Corporate only charges an $18,500 franchise fee to start a Jersey Mike’s. The total cost of starting a Jersey Mike’s is estimated to be between approximately $140,000 to $750,000. These costs for starting up your business are relatively low, and they can enable you to start your first franchise. It is important to note, however, that Jersey Mike’s requires you to have a minimum net worth of $300,000. Your liquid assets need to total $100,000.
These are still relatively small requirements when compared with other franchisors.
As for profit margins, profits at a Jersey Mike’s franchise location can be substantial. They have a reputation for being highly profitable, even after overhead costs associated with labor. Starting a Jersey Mike’s franchise is a great choice.
You may have passed a Kumon in a shopping center or had someone you know be a Kumon student. Kumon, in any case, is an education company, founded in order to advance the mathematics and reading skills of young children. Rather than acting as a tutoring service, Kumon is a place where children can supplement their education with advanced learning in the subjects of math, writing, and reading.
One of the greatest reasons to start a Kumon franchise is its low startup cost. The fee for franchising a Kumon location is $2,000. They also have a training kit, FBI fingerprint check, materials purchase, and more listed as their initial costs. In all, these amount to a low total of only a few thousand dollars. However, you need to be sure that you meet Kumon’s requirements to be a franchisor. Kumon requires you to have a net worth of $150,000. You also need to be sure to have $70,000 in liquid capital. These requirements are very low, enabling the easy opening of a Kumon franchise.
There is a lot of potential for high profit margins with Kumon. The brand offers the Kumon method for teaching and enables you to make connections and help students. The Kumon brand charges $34-$38 per student per month. Kumon comes with high gross profit margins and allows you to become an instructor and teach students with proficiency.
McDonald’s has a sound reputation for being a great business franchise with a large chance of success. The brand is a well-established international fast food chain. The McDonald’s franchise system comes with experienced know-how for the operation of successful McDonald’s franchises. The McDonald’s template for running a franchise is known for its high profit margins.
While McDonald’s upfront fee of $45,000 as the initial franchise fee is not a small amount, it is a relatively small amount of capital for fees in this area. Yet, the associated startup costs are more expensive. The total investment into a McDonald’s may reach between $1-$2 million. Moreover, McDonald’s requires franchisees to put 25% of the downpayment cost in cash, greatly limiting the ability of franchisees to use leverage at the onset of the business. Royalty fees are low, at only 4%.
Additionally, it is important to note that you will need $500,000 of liquid capital to be considered for the franchise application.
In any case, McDonald’s as a franchise is a proven business model, with great return on investment through its high profit margins. Though its startup cost may not be the lowest, you might consider it low in the fees paid to corporate.
If you are concerned about the startup cost for your ideal franchise, it is a good idea to consider your financing options, like taking out a business loan to open a franchise. One of the reasons you might be concerned about the startup cost is the perception that you might have to pay the whole amount in cash at the beginning. This is not necessarily the case. In many scenarios, there are different options to finance your franchise startup cost. That reduces your present burden to make the finances work for starting your franchise in a lump sum.
This is especially true if you are more concerned about upfront costs rather than ongoing costs. Different types of financing options allow you to reduce the real cost to you of personally funding the upfront cost of a franchise. This shows the time value of money.
The time value of money essentially states that a given amount of money is worth more today than the same amount of money tomorrow. Through this logic, it may be justifiable to finance a startup cost of a franchise today to allow you to make more money tomorrow. This reduces the relative expense of money you might spend today. This is made possible through different types of financing.
This process works similarly to financing a mortgage or a car loan. Your franchise can be franchised with interest and allow you to fund the startup cost easier today. In any case, exploring ways to do this and reflecting on your financial situation would be a great first step to determining the best and cheapest restaurant franchise option available to you.
If you have considered your personal finance situation and have determined that financing a franchise is the best option for you, the first step is to have a conversation with your prospective franchisor.
You should also check the franchising policies of your franchisor. A great start to doing this would be to look at the policies contained in the cost of a franchise and related policies in your franchise agreement. One of the examples of a beneficial policy some franchisors have for franchisees is that some of the equipment may be able to be financed from the franchisor in your agreement. The ability to lease or finance through your franchisor may decrease your startup cost and increase the ease with which you experience starting your startup. This is despite any downpayment you may still have to pay for this ability to finance.
There may be additional options to finance the startup cost of your franchise, such as the initial franchise fee. While it may be beneficial to start a conversation with your franchisor about additional financing options they offer, there are other financing options available to you. Bank loans, small business loans, or other forms of financing offer you the ability to finance some of your startup costs for your franchise. In any case, some of these financing options may allow you to access your ideal franchise with high profit margins. Here are a few common types of financing you may want to consider for a franchise:
SBA loans are a popular resource for small business owners when choosing financing. SBA loans are unique in that they are offered through the United States Small Business Administration (SBA) and backed by the federal government. This means that lenders that lend to borrowers through the SBA’s various loan programs face substantially less risk. As a result, they are able to offer lower interest rates and lend to borrowers who might not otherwise qualify for them.
SBA loans do come with one downside, and that is the fact that the application process is typically quite long and drawn out. Business owners will have to provide substantial documentation in order to get to the finish line of the application process, including information on their company and personal credit history.
The most popular loan program that is offered by the SBA is its SBA 7(a) loan program, which is a special type of term loan they provide. With an SBA 7(a) loan, borrowers can access up to $5 million in funding. It should be noted that SBA loans can only be used for certain franchises that the SBA has vetted and pre-approved. The list of franchises that the SBA is willing to lend to can be found in their online franchise directory, which the SBA keeps up to date with all the different franchises they will work with.
Term loans are one of the most common forms of loans used by all small business owners, not just franchise owners. Term loans are a great resource because they provide borrowers with an upfront sum of money that is then paid back over time with interest during a set period of time (the term of the loan). Term loans are offered with fixed and variable interest rates, with a variety of different term lengths, and with many different values. This gives borrowers a large range of choices that they can make to find a loan that is right for them and their business.
Term loans are also offered by traditional brick-and-mortar lenders – often what individuals think of when they think of taking out a loan – and alternative lenders (like Biz2Credit!). However, there are some important differences between the term loans offered by traditional banks versus alternative lenders that you should take into account.
Term loans offered by traditional banks tend to have very long application processes that require a detailed business plan, lots of paperwork, and a great deal of documentation. Even after completing this process, there is no guarantee that you will end up getting the loan. Business term loans are notoriously difficult to obtain from traditional banks due to their strict standards and requirements, which they have in place to limit their exposure to risk. However, because of this long application process and these strict standards, they are also able to offer some of the lowest interest rates available on term loans – which can be great if you are able to be approved for one.Â
Term loans from alternative lenders are much easier to obtain due to their much less stringent requirements. Alternative lenders typically have quick and short application processes that often allow you to have the funds in as little as 24 hours. However, due to these less stringent standards, the interest rates on loans from alternative lenders tend to be higher. This is because alternative lenders cannot assess the risk of borrowers as thoroughly as traditional banks due to how their process works. As a result, borrowers have to make tradeoffs when they choose between traditional banks and alternative lenders for loans.
Lines of credit are a special type of financing in which borrowers have access to a set amount of capital for an indefinite period of time. They can then draw (borrow) on this amount at any time up to the amount they have been approved for. Then, once they pay this amount back with any associated interest, they can draw on the line again. Lines of credit typically have variable interest rates – often tied to the prime rate – that adjust with the market.
Because lines of credit remain open, they are often an important resource for small businesses to have access to since they provide a source of cash that can be accessed quickly. This makes them great for shoring up cash flow or short-term borrowing.
Unfortunately, because lines of credit typically have higher interest rates that are variable, they are not great for long-term financing. Instead, they serve better as a form of gap funding or interim financing that your business can use until you are able to find a permanent financing solution.
Equipment financing is another go-to resource for financing that franchise owners often take advantage of. What makes equipment financing unique is that the equipment you purchase with the loan serves as the collateral on the loan. This makes equipment financing less risky for lenders, allowing them to offer lower rates with less stringent qualification requirements.
Equipment financing can be used for any equipment that you need to purchase for your franchise. As such, it is likely something you will want to look into since starting up a new franchise – particularly a restaurant franchise – typically requires a lot of commercial equipment.
Starting a franchise is never a cheap or inexpensive process. National franchises know the value of their brands – especially the best franchises – and they make franchisees pay to have access to them. Additionally, like you, national franchises are in the business of making money, and they know how to do that (otherwise, they would not have grown to become a national brand). However, some franchise options still have lower startup costs than others, and some have higher profit margins than others.
The key to finding the right franchise is to do your research. While one franchise might make sense for one individual, another franchise might make sense for another. So, be sure to research a lot of different franchises and compare the terms of opening and operating each. It’s not easy work, but doing your research upfront can mean the difference between success and failure in the long run. With the right approach, you could be well on your way to finding a franchise that makes sense for you!
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