All told, the legal costs for this more aggressive franchise program can reach $50,000 or more

How High is "Up"?

If you're seeking to franchise aggressively, however, these costs can increase significantly.

Legal Costs. Legal expenses for a more aggressive rollout may include additional state registrations and more aggressive and/or complex development contracts (area development contracts, area representative contracts, etc.). There are 14 registration states and a number of business opportunities states--each has franchise registration fees aggregating somewhere north of $6,000, not including the incremental legal costs your franchise attorney charges you. All told, the legal costs for this more aggressive franchise program can reach $50,000 or more.

Planning Costs and Consideration. A more aggressive growth strategy, by its very nature, also requires additional planning. While a company planning on conservative growth can probably get away with a fairly informal planning process, aggressive growth dictates a thorough understanding of the competitive environment and the financial implications of each business decision. You need to build these financial and structural decisions on a solid understanding of the organization, and know the costs of building that organization in terms of people and capital.

The aggressive franchisor must bear in mind that even seemingly small mistakes, when multiplied by hundreds of franchisees, can be the difference between success and failure. Take royalties, for example--while the difference between a 4 and 5 percent royalty may seem small, that additional 1 percent could cost the franchisor $5,000 to $10,000 or more per franchise sold. That "1 percent mistake," when multiplied by 100 or more franchisees and by five or more years on the contract, can easily mount into the millions.

Unfortunately, this more thorough planning process can be quite expensive. Depending on the nature and scope of research conducted on the market and on competitors, the amount and complexity of financial planning, and various other factors, the costs of hiring a consultant to assist in the development of these plans could range between $25,000 and $35,000. In more complex situations, this planning can become significantly more expensive.

Quality Control. With more aggressive expansion plans, quality control will also become both more cumbersome and more expensive. With more franchisees going through the system, there will be a need for a more formalized training program, and perhaps training videotapes and other training tools. Again, this could double the costs of your quality control.
Marketing Your New Franchise

Of course, the biggest difference between the conservative and the aggressive growth franchisor is in the areas of franchise sales and marketing. While the conservative franchisor will be content to let prospective franchisees come to him and operate in a reactive fashion, the aggressive franchisor will want to "make it happen."

Brochures. Your marketing efforts start with the development of professionally designed materials. A full-sized, four-color brochure is virtually the cost of entry in modern franchising. This brochure not only sells the franchise opportunity to the prospective franchisee--it also plays a key role in demonstrating the credibility of the franchise to key influencers: accountants, attorneys, bankers and spouses, who will play a key role in the franchise selection process. The design of a good brochure will cost between $7,000 and $10,000. Printing this brochure, depending on print process, paper quality, quantity printed, and a variety of design specifications (full bleeds on pages, dye cuts, stapling, etc.), will cost another $8,000 to $10,000.

For companies with physical units, or companies that plan on using a lot of direct mail or trade shows to promote their franchise, another great tool is the mini-brochure. This brochure, typically done in a two- or three-fold format, can be produced in quantity relatively inexpensively (design costs and printing costs totaling around $5,000), and serves as a lead generator more than as a credibility piece.

Internet. A professionally designed website is also essential. In addition to franchise information, your website should be equipped with lead collection forms and, ideally, an autoresponder matrix that helps you sort the wheat from the chaff. And this site needs to be optimized for franchising. While websites are increasingly less expensive to create, you should still budget $10,000 to $15,000 for a really good one.

For franchisors looking for more aggressive growth, franchise sales videos are increasingly important in the sales process, as streaming video becomes a more integral part of the internet. Professionally produced videotapes promoting the franchise offering can generally be developed for between $15,000 and $25,000.

Marketing Budget. At least as important as the marketing materials will be your marketing budget. Depending on the size of the investment in a franchise opportunity, you should budget between $5,000 and $7,500 (and in some instances more) per franchise to be sold to a promotional budget. If you're planning to sell 20 franchises in your first year, an annual marketing budget of between $100,000 and $150,000 is not at all unrealistic. Of course, some of these funds will be recaptured as you begin to realize franchise fee income, but since it takes an average of 12 weeks to sell a franchise, as an aggressive franchisor, you should have at least have five to six months worth of advertising money--or about half your annual budget--on hand when you get started.

To optimize these expenditures, you should also invest in primary market research (to better understand your prospective franchisee) and in a first-rate marketing plan. While inappropriate for more conservative franchisors, these planning activities will add another $10,000 to $15,000 to the budget.
Hiring a Sales Force

But the single biggest investment you'll have in the development of an aggressive franchise company will be in your people.

Most companies getting into franchising for the first time do so by leveraging off of their existing staff. Often, the business founder acts as the primary franchise salesperson, with support from staff in the areas of operations and training. And while this works in most growth scenarios, the more aggressive the growth scenario, the sooner you should plan on bringing on incremental staff to fill key roles in the areas of franchise sales, franchise training and field support.

The first hire for the aggressive franchisor is generally the franchise salesperson. A proven franchise salesperson will generally command a compensation package in the low six figures, with at least some of this package being performance based. Top franchise sales pros can command twice the salary or more--but are generally worth their weight in gold. Again, you should expect the franchise salesperson to begin earning his keep by selling franchises relatively quickly (a good franchise salesperson should be able to sell 12 to 20 franchises per year), but you should anticipate the need to fund at least four to six months of their salary without any fee income. Add to this salary the fees you'll pay to an executive recruiter to locate this top talent (who will generally command a fee of 25 percent of first year's compensation), and you can probably budget $75,000 in personnel costs before selling the first franchise, should you go this route.

Other hiring generally comes later--after franchise sales have started and the royalty stream is established--but again, the more aggressive the growth, the earlier these hires need to take place.
Cash Flow Analysis

While this article provides an overview of the costs of getting into franchising, the best way to get a reasonable understanding of all these costs is to develop a cash flow analysis that accounts for all your hiring, marketing, legal and development needs, as well as for the inflow of franchise fees, royalties and other sources of income. While many factors will influence your ultimate cash need, a good rule of thumb is that an aggressive franchise program may require a cash flow budget of $250,000 to fund development costs and franchise growth until franchise sales begin "paying for" incremental personnel and advertising needs.

But remember, rules of thumb, like thumbs in a softball game, are often broken. Many franchisors have succeeded in growing significant franchise companies with far less--while others have failed at franchising after investing far more.

While it is important to be properly capitalized to franchise, it is important to remember that the costs of creating this franchise company, even in aggressive growth scenarios, is often less than the cost of starting just one more company operation. That investment in a franchise program can grow to be a franchisor with hundreds, or perhaps thousands, of franchised units, providing you with leverage not found in any other means of business expansion