How Much Does A Franchise Cost?

A basic guide through the many open and hidden costs, which should be taken into account when evaluating and purchasing a franchise business opportunity.

Before investing in a franchise opportunity, you should ensure that you set aside plenty of time to work out exactly what the final cost will be.

Some franchises that are actively recruiting do disclose the capital requirements. Some of the brands may also have established franchises for sale, but these will require a considerably higher investment.

Figures in relation to the investment required are usually clearly indicated in the franchisor’s prospectus and should be confirmed in the Franchise Agreement.

Today, most genuine business format franchises cost £15,000 or more, since the initial training does need to be comprehensive, including a basic minimum recommendation of two weeks before the franchisor joins you in your territory to help get the business up and running.

Having identified the brands for your shortlist, you should request a complete prospectus with all of the financial information relating to both the initial investment and projected revenues in the first to third years.

Do Your Research

Before meeting the franchisor, you should talk to some of the brand’s existing franchisees to confirm exactly what the cost to own and operate their franchise has been.

When you meet the franchisor, you should again ask them the important questions in relation to total investment requirement.

Remember to include sufficient funds for working capital as well as unforeseen costs when creating your final business plan. For example, a budget of at least £2,500 should be put aside for any franchise costing up to £95,000 and thereafter 10 per cent of the total investment requirement.

Some franchisors do not understand the tax benefits of breaking down the total investment requirement. If you see a franchise being offered where they talk about the total franchise package fee, they probably have not employed the services of a professional Franchise Consultant.

What Is Included In The Package?

A genuine business format franchise will have up to 21 elements that need to be carefully identified and either explained in detail or clearly illustrated in the franchise offering. These will cover the initial training, the ongoing training and every element of what the franchisor is delivering to you in order to achieve the goal of owning and operating a successful and profitable business.

Next, look at the length of time and content relating to the initial training.

The franchisor has the responsibility of training you in every area of not only running the business and understanding the products and services, but has also helped you to thoroughly understand your responsibilities in every area. These will include time management, goal setting and creating a business plan that can be followed week by week.

While there are no franchise laws in the various legal jurisdictions of the UK, there are laws that relate to franchising. For example, should a franchisor not have registered and protected their trade or service marks, then they are not in a position to even offer you a franchise.

Working Capital

Working capital will vary from brand to brand with many different requirements ranging from acquiring a property or offices, equipment and filling out the premises if appropriate.

Remember that in all cases you will be responsible for meeting all of the start-up costs other than those that the franchisor is agreeing to deliver in the franchise package.

If commercial premises and shopfitting are involved, this could be a major additional cost that you must take into account.

If you are seeking funding, you are encouraged to talk to all of the banks that have franchise departments. They will also be able to let you know whether they have previously supported the acquisition of your franchise for other franchise owners.

Always Borrow More Than You Need

Overdraft facilities will usually be required in a franchise business start-up situation, so it is essential to arrange your finances so you have a reasonable financial safety net. Remember you should always try to borrow more than you need so that you do have that flexibility. It is also advisable when creating your cashflow projections, to arrange an overdraft facility with your bank and let them look at your detailed business plan.

You will also need to cover your usual living expenses while you set up the business and are no longer receiving a salary. In other words your mortgage, utility bills, property maintenance, insurance etc. all need to be catered for. This is why you will need to ask the franchisor for a totally realistic assessment of working capital in addition to the franchise investment requirements.

Ongoing Fees

You should also check out what Management Service Fees (MSF) you are liable to pay plus any additional costs, such as an advertising or marketing levy, when evaluating your financial requirements.

A Management Service Fee is the funding your franchisor needs in order to provide you with continual ongoing support, advice and guidance. It is normally a percentage of your total turnover and paid to the franchisor at regular predetermined intervals – usually monthly.

You may also be asked to make additional payments relating to services the franchisor will automatically offer you – again check out every detail. When you have studied every element of the franchise package being offered then you can feel very comfortable to move forward.

Making Your Decision

Should you have any doubts about the true costs of buying into the franchise, ask the franchisor to provide a complete statement of all costs involved in buying, opening and operating the franchise outlet.

Work closely with your accountant when drawing up your business plan and ask them about the advantages of running a check on your intended franchisor to ascertain the true state of their financial health.

A wise franchisee will also build into their calculations a budget to research not only the franchise but also any competition in the franchise and non-franchise sector.

You should also look at the different expenses you will need while choosing a franchise, including any travel and costs to attend franchise exhibitions and anything else that you need so you truly understand the franchise market.

When you have examined all of the glossy brochures and spoken at length to the franchisor and to as many of their franchisees as possible, it is time for you to sit back, review any advice and guidance you have received from experienced Franchise Consultants and your family. Only then should you decide whether or not you have, in fact, found your ideal franchise opportunity.