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TheStreet Open House

Buying a Cheap Franchise Can Get Expensive

NEW YORK ( MainStreet) -- Many franchised companies tout affordable start-up costs, but new franchisees should be careful of the difference between franchise fees and how much it may actually cost to get the business truly up and running.

Even with signs companies are starting to hire again, many entrepreneurs are turning to franchising as an alternative to corporate America.

Concepts that don't require a lot of money to establish, such as home-based businesses, are particularly popular.

"We expect the interest on lower-cost franchises to remain high in 2012," says Franchise Gator's general manager, Farrah Kennedy. "While a lot of these franchises are not as sexy as the more expensive food or retail, they often have better margins and allow for a great work-life balance. For someone just starting out on their entrepreneurial journey, these can be a great starting point to learn the ins and outs of running a business, manage employees, etc., and good income for a sole proprietor."

Besides home-based businesses, there are many franchises with more than one type of store or concept available for sale -- for varying start-up costs. But new investors and franchisees need to watch out for the difference between initial franchise fees and the total investment needed to get the business properly running.

The start-up expense is the amount of money required for a franchisee to open and operate a location for at least three months. That may not be reflective of the total investment required, though, which includes such things as real estate leases, operating capital and marketing costs.

It's also important to match a proprietor's risk level and cash and financing availability to an appropriate concept. (Most franchises have a minimum net worth requirement and liquid asset requirement for new franchisees.)

Potential franchisees shouldn't just jump into any name. Just because the company may have low start-up costs doesn't mean they are reputable. Before putting down money, franchisees should make sure the company has a "proven system" that has been easily replicated and successful in different scenarios, Kennedy says.

"A franchise is not a guarantee of success, so make sure you can bear the risk," she says.

If you are an existing operator or can be extremely frugal, these five companies are reputable and require less than $20,000 to get started, according to the International Franchise Association.

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