Costs involved in buying a franchise

Ensure your new franchise business is a success with a thorough understanding of all the costs involved in buying and running a franchise.

The cost of buying a franchise varies widely depending on the nature of the franchise business. Home-based franchises and personal services are much cheaper than those that require premises, equipment or a fleet of service vehicles. Knowing in detail the full and ongoing costs in buying and running a franchise will ensure your business is a success.

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Franchise fee

This is the one-off, up-front fee that the new franchisee pays to the franchisor for the right to use their name and business concept. Franchise fees can start from as little as £5,000 and run all the way up to £300,000 for full-service, prime-location restaurants. The size of the fee typically reflects the cost of setting the franchisee up in business and the level of support and services provided by a particular franchisor. A lower entry fee, therefore, doesn’t necessarily mean a franchise offers better value.

The franchise fee usually includes training and help with staff recruitment, along with territory analysis, marketing and promotion. Depending on the nature of the franchise, it may include site identification and development, help with specialist equipment purchases, franchise décor and supplier contracts. A proportion of the fee covers the parent company’s franchise development costs.

Franchise start-up costs

This will depend on the nature of the franchise. A home-based franchise will have few start-up costs, while a fast food restaurant will require fitting out with furniture, fixtures, equipment and signage. If you’re selling the franchisor’s products, you’ll need to buy inventory – and some franchisors may require you to do so in specific volumes. You’ll may also need to buy equipment vehicles, and other supplies. Your franchisor should provide an estimated cost of what’s required to open your franchise.

Working capital for financing a franchise

As with any business, you’ll need sufficient working capital to keep your franchise up and running until you begin making money. Despite the fact that you’ve effectively bought a business off the shelf, most franchises make little profit in the first year of business. So, in the meantime, you’ll need a pillow of working capital to pay suppliers, staff and other business expenses, as well as support yourself and your family. The amount needed is often underestimated by franchise novices. Depending on the franchise, three to six months of working capital may be enough but for some two or three years’ worth of working capital is appropriate. Your franchisor should be able to advise you on how much you need.

Ongoing franchise royalty fees

After the initial franchise fee, start-up costs and the necessary working capital, there’s still another fee to take into account. The majority of franchisors charge a management or royalty fee. This may be a fixed monthly fee for the ongoing rights to run the franchise or a percentage of either your profits or your sales revenue. Most franchisors prefer to base the fee on sales rather than profits, as it’s easy to calculate but if your costs per sale are high, this type of fee can dramatically eat into your profits. Always check how royalty fees are calculated before signing up for a franchise.

Ongoing franchise advertising or promotion fees

You may be required to contribute an advertising fee for ongoing promotion and marketing activity by the franchisor to promote the brand on a national level. Alternatively, you may be asked to spend certain amount on local advertising for your franchise each month.

Other franchise costs

There are other costs involved in running a franchise including:
Franchise renewal fee You may need to pay a fee when extending your franchise agreement.
Franchise resale fee A small fee is normally payable to the franchisor when selling your franchise. This covers admin costs and the cost of training the new owner.
Professional services Remember to factor into your budget the cost of using professionals such as lawyers, accountants and architects during the set up and running of your franchise.
Insurance cover As with any business, you’ll need insurance cover for your franchise. The level of insurance cover should be explained in the franchise agreement.

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