Costs of investing in a franchise
The cost of investing in a franchise is dependent on several factors such as the nature and size of the business as well as the territory you’ll be operating in.
An initial outlay may be as high as £500,000 or as low as £5,000 and will, in most cases, include the following costs.
Initial franchise fee
This is the basic one-time fee to ‘buy in’ to the franchise and usually accounts for 5-10% of the total investment required. For franchisors this is rarely a source of profit and will simply help to reimburse them for the time and cost spent developing the franchise, recruiting and helping the franchisee find a suitable location to operate in.
Although typically included in the initial franchise fee, franchise training fees can sometimes be levied as a separate cost.
In some instances, the franchisor may sublet the premises to you and there may be advance rent or premiums which need to be paid.
There may be additional fees if the franchisor has contracted a third party to undertake the shopfitting.
Vehicles & equipment
If vehicles and equipment are essential to the running of your business, there are likely to be additional costs to factor in. This could include outright purchases or an asset finance deal where an initial outlay is required followed by monthly payments.
Initial stock may need to be bought directly from the franchisor or an approved third party party. In either case, you should receive guidance from your franchisor on exactly how much stock is required to hit the ground running.
Working capital will be necessary to ensure basic costs can be paid (salaries, energy bills, taxes, rent, etc) while income is being generated.
Initial and ongoing promotional costs - such as advertising online, in print or on the radio - may be factored into the initial fee or itemised separately, depending on your franchise agreement.
Financial questions to consider
How much can you personally invest?
What proportion of your personal resources can you put towards the total franchise cost? Ensure you carefully crunch the numbers and ascertain exactly how much you can afford to invest and how much you need to live on on a month-to-month basis.
How much will you need to borrow?
The majority of franchisees will need financial assistance for the initial investment. Work out how much you will need to borrow and what franchise funding will best assist you (for example, a small business loan, credit card or invoice finance solution might all be worthwhile). Also, it may be sensible to take out an overdraft to ensure you have enough working capital during your initial trading period.
What security can you offer on any loan?
Ask yourself how long you will need to get the loan paid back and consider that any outstanding debt will need to be settled by the end of the franchise term.