There’s a lot to love about owning a restaurant franchise. From built-in brand recognition and customer loyalty to operational efficiency and marketing resources, you get a big leg up when starting your next venture.
Franchises are unique from independent restaurants in a lot of ways, including the costs of buying, launching, and operating one. That’s why you’ll need to understand how financing for franchise restaurants works before you head to the market.
As restaurant real estate agents who work closely with both franchise owners and franchisors, we’re uniquely knowledgeable on this topic. In this blog post, we’re sharing our best tips on how to finance a franchise purchase.
Searching for a great business opportunity? Check out our for-sale franchise listings.
What Does it Cost to Buy a Franchise?
As with any type of restaurant, buying a franchise can be expensive. From simply getting the business launched to ongoing operations, there will be significant costs involved. Even if you are an established restaurateur or have a wealth of savings, buying a franchise will most likely require a loan of some kind. More on this later.
Have more questions about owning a franchise? Explore these other blogs from our site.
- What Are The Best Franchises in Canada?
- Owning a Franchise: What’s in Your Control?
- How to Interview a Franchisor
Breaking Down Franchise-Specific Costs
You’ll get plenty of support from your franchisor to help make your business a success. But when it comes to costs, you’re on your own. As part of planning and financing your franchise purchase, you’ll need to understand and account for the costs involved.
Here’s a breakdown of some of the costs you can expect.
The Initial Franchise Fee
The initial franchise fee (or simply ‘franchise fee’ depending on who you ask) is one of the largest upfront costs involved in a franchise purchase. It’s essentially a one-time onboarding fee paid to your franchisor for the right to use their brand, trademarks, business model, and other resources. So what do they cost?
Franchise fees aren’t one size fits all. Depending on the brand itself and where you’re located, the amount can range from thousands to tens or even hundreds of thousands of dollars. That said, there’s usually a direct correlation between how popular the brand is and how much the initial fees are.
In Ontario, averages are around the $25,000 mark, but again, this can vary.
Franchise Royalties
Franchise fees aren’t the only costs you’ll pay to the franchisor. Once your business is up and running, you’ll pay ongoing royalty fees too. These are usually calculated as a percentage of sales. Once again, your exact royalty rates will depend on who your franchisor is. In Ontario, most royalties range from 5% to 8%.
Marketing Fees
Some franchisors in Canada also collect a separate marketing fee in addition to standard royalties (although they can also be built in). These are also collected as a percentage of revenue, with rates typically hovering around 2% to 5%.
General Business Expenses
You’ll also need to account for a whole host of other general business expenses in addition to the franchise-specific costs. One of the biggest of these will be buying or leasing commercial real estate, along with any upgrades or modifications required by the franchisor. Labour (employee wages and benefits) is another significant expense that you’ll need to budget for.
Interested in starting your own restaurant? We’ve carved up some helpful tips on our blog. Check out these blogs next!
- What Permits Are Needed to Open a Restaurant in Ontario?
- How to Find a Restaurant For Sale in Toronto
- How Long Does it Take to Build a Restaurant From the Ground Up?
Financing Options For Future Franchisees
Just like you would get a mortgage for a house, buying a franchise will require you to obtain some degree of additional financing. This could be a small business loan, a line of credit, or even working with third-party investors.
If you need help deciding, talk to a restaurant real estate agent or your financial planner. They can assess your personal finances and recommend the best lending route for you.
Small Businesses Loans
Many franchisees choose to go with a traditional small business loan. These are offered by most major banks in Canada (BMO, TD, CIBC, etc.), but there are independent lenders out there as well. The Business Development Bank of Canada (BDC) is another popular choice.
Keep in mind that every lender offers products. You’ll want to do your research and weigh every option before making a decision.
How Fast Can You Get Approved For Franchise Financing?
Obtaining financing for any type of restaurant purchase isn’t an overnight process. Beyond preparing and submitting your own application, lenders will be very thorough in deciding what you qualify for. When all is said and done, getting approved could take several weeks to several months.
Buying a franchise? We can help! Send us an email at ryan@carverealestate.com or give us a ring at 416-618-0054 to get started.
