Buying a Franchise: What are the Costs?

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Buying a Franchise

Buying a franchise costs more than starting a small business where you can keep expenses to a minimum. I'll limit my discussion here to the major tutoring franchises, but be aware that there are new tutoring service franchises popping up every year with varying costs.

So What Does A Franchise Cost?

If you are buying a franchise, the initial minimum franchise fees generally range from about twenty-five thousand dollars on the low end, to forty eight thousand dollars on the high end.

Also, franchises charge an ongoing monthly, quarterly or yearly franchise fee or royalty (in addition to the original purchase price) which is usually a percentage of your net or gross receipts for the period in question.

I talk in generalities here because every franchise has different fees and schedules.

Let's take a hypothetical look at the cost of buying a franchise using three popular tutoring service franchises:

As of the writing of this article, Sylvan Learning Center has a franchising fee of between $45,000.00 to $48,000.00. They also require a start up cash investment of $160,000.00 to $200,000.00. Total investment generally range between $210,000.00 to $260,000.00, and they offer third party financing.

Huntington Learning Center requires franchisees to have liquid capital of $60,000.00, a net worth of $250,000.00 and a total capital investment of $203,000.00 to $393,000.00.

Club Z, In Home Tutoring Service requires franchise fees between $24,500.00 to $54,500.00 up front with a total capital investment between $32,000.00 to $65,500.00 and does not provide financing. Club Z also require a 6% ongoing royalty payment.

What Do You Get For Buying a Franchise?

Wow, that seems like a lot of money compared to starting a small business from scratch, so, what does this buy you?

First and Foremost, a Recognizable Brand Name

Think Sylvan, Club Z, Huntington Learning Center as examples. Who hasn't run across the name "Sylvan Learning Center" when searching for tutoring services? Sylvan outspends all other tutoring companies in advertisement (approximately $40 million according to Sylvan), and people (customers) generally will trust recognizable names.

Just like shoppers go to Costco, Walmart or Sears, so too will they go to a familiar name when searching for a tutoring service or tutoring business.

Part of what makes these companies so recognizable is their advertising, which is a part of their franchise fees. Trying to run an advertising campaign like Sylvan would be cost prohibitive for small do it yourself tutoring service.

An Established and Proven Business Model

In my opinion, this is the core benefits of buying a franchise. Sure it's great to have all that advertising, but if the business model is unproven, what's the point?

You purchase a franchise with the knowledge that many other franchisees have purchased it, applied their systems, and now run successful businesses.

The idea here is that others have succeeded using this model, but this isn't a guarantee. You still have to do your part by working the model.

Also, the franchisor provides either "on-site" training, or training at their corporate headquarters for franchisees.

As an example, Huntington Learning Center has a five week franchisee training program and continuing support in systems, education and sales.

Think of it as buying the business systems which are a part of the business model. Your business is composed of a series of business systems, such as billing, scheduling, accounting, advertising, legal, tutoring etc.

Systems are a set of rules and guidelines that tell you how things are done, and how problems are handled.

When I started my tutoring business, I had to create all of my own systems. Through trial and error, I figured out how to schedule, bill, and so on, and believe me, this takes time! Time that might be better spent doing other things...like making money!

By buying a franchise, you cut down on the learning curve of starting a small business from scratch.

If you like the idea of getting your tutoring business up and running as quickly as possible, buying a franchise may be your best bet. There is less to figure out, but of course your up front costs will be higher.

If you have the finances (and the personality) for buying a franchise, send them an e-mail for a Franchise Circular, and someone will call you pretty quickly.

Franchising laws require a certain amount of disclosure, and this information can give you a better idea of the value of the fees they charge.

You can usually tell if the franchise is a good one by the level of disclosure they provide. Be wary of any franchise that seem to be hiding the ball. When I was thinking about purchasing a franchise, I always got the feeling that they were interested in entering into a mutually beneficial and profitable business relationship.

SBI!