When you’re looking to start a franchise, the costs can be a significant deciding factor. And when it comes to coffee franchises, there’s no one answer – the cost of a coffee shop franchise varies widely depending on the type of business, the size, the location, and other factors.
But that doesn’t mean you can’t get an idea of what to expect. Typical starting costs could be between $150,000 and $1 million (or more). To understand the disparity, we need to discuss the different variables impacting franchise costs. Hence, whether you’re cutting your teeth in business or searching for a coffee franchise, read on for some valuable insights.
- Type of Franchise
What type of franchise are you interested in? Are you looking at a drive-thru coffee shop or a sit-down cafe? Every kind of business comes with its own set of costs – from the price of real estate to the cost of equipment.
Full-service cafes (sit-down outlets) tend to have the highest initial investment, partly due to real estate and construction costs. These businesses also tend to have the highest ongoing expenses, such as rent, utilities, and labor (more on these below).
Drive-thru coffee stands are typically less expensive to get up and running, but they come with their own set of challenges. For instance, they have a more limited service offering. You may also find that the ongoing costs are higher. For example, you’ll need to staff the drive-thru window and manage inventory, meaning you’ll have additional labor costs.
Still, you may experience increased competition from other businesses in the same space. In addition, this type of franchise may require specialized equipment to speed up service delivery.
- Size of Franchise
Undoubtedly, larger businesses will have higher start-up costs, but they also tend to be more profitable and offer more significant economies of scale. Smaller companies, meanwhile, have lower start-up costs but may have difficulty achieving the same level of profitability.
Still, more popular and usually larger franchises – in terms of their networks – tend to demand higher fees than their less illustrious counterparts. As a result, they may be a better option if you have the financial muscle to support such a venture.
- Location
If you’re looking to open a coffee shop in a high-traffic area, you can expect to pay more for rent and other expenses. On the other hand, a rural location may be cheaper, but you’ll need to generate more customers to make up for the lower foot traffic.
Still, franchisors charge more in franchise fees for prime real estate locations. All things being equal, franchise costs will be higher in an urban area than in a rural area.
- Initial Investment
The initial investment is the money you’ll need to get the business up and running. This includes the costs of leasing or buying property, building out the space, and purchasing equipment. It also factors in the franchise fee, the amount you pay the franchisor for the right to use their name, proprietary systems, and business model.
For instance, franchise fees vary widely. The size of the franchise and the location are the two main factors that will impact the fee. For example, the initial investment for a small coffee franchise may be $10,000, while a larger franchise may ask for upwards of $50,000.
- Franchise Royalties
Besides the initial investment, you’ll also need to pay ongoing franchise royalties and fees. These royalties are typically a percentage of the sales generated by the franchise, and they go towards the costs of marketing, research and development, and other support services.
Some firms charge a monthly royalty plus an ad royalty fee. Inevitably, such recurring expenditure impacts your franchise costs.
- Ongoing Costs
Ongoing costs of running your business also factor into the equation. These include rent, utilities, inventory, labor, and royalties. Such expenses can add up. Plus, it means you need to set aside some cash to cater to them. It also explains why franchisors require you to have working capital or liquid cash before they allow you into their network.
Talk directly to the franchisor you have in mind to find out exactly how much it will cost to establish your unit. They can give you a better estimate based on the factors mentioned above. You could even go a step further and read the firm’s franchise disclosure document – this will give you a more detailed breakdown of the costs associated with the franchise.
Overall, the cost of a coffee franchise isn’t the only thing to have in mind – it’s only part of the equation. Think about the time commitment, level of risk, and whether the business is a good fit for your skills and interests. In short, look at the big picture, and do your homework (all of it) so you have all your i’s dotted, and t’s crossed from the get-go.