Costs involved with purchasing a Franchise

So, you’re interested in buying a Franchise? But don’t truly understand the extent of how much capital is required to fund your dream business…. Let us break this down for you.

Franchises completely vary depending on the sector and type of franchise opportunity, some are work from home and others may be van based franchises, kiosk franchises, retail franchises or office based franchise opportunities. Naturally a retail based franchise would incur greater costs than a work from home franchise opportunity. According to the Natwest BFA Franchise Survey the typical start-up costs for a catering franchise opportunity are around £110,000, whereas the average star-up costs for a personal services franchise opportunity are around £45,000.

It’s vital that when exploring the possibility of purchasing a franchise that you undertake your full due diligence and gauge the full costs that you’ll be liable for when purchasing the franchise and any costs that you’ll be liable for later down the line. No two franchises are the same, but generally there are some standard costs involved when purchasing that we’d like to guide your through.

The Franchise Fee

A franchise fee is a fee that a person pays to operate a franchise branch of a larger franchise company and enjoy the profits therefrom. As mentioned earlier, the initial franchise fee will vary from brand to brand and is a sum transferred by the franchisee (you) once the franchise territory has been awarded. In most cases, the franchise fee will cover vital elements to ensure that you succeed with your new business venture.

- Franchise Training

- Recruiting

- Franchise Territory analysis

- Help identify a site (if required)

- Equipment and tools

- Vehicles (if required)

- Franchise Launch

Working Capital for your Franchise

Working capital is the sum required to fund the day-to-day operations of your franchise business. All franchise businesses, indeed all businesses, have working capital and a working capital cycle to function.

The major components of working capital for your franchise are:

• Cash
• Debtors [accounts receivable]
• Stock [inventory]
• Creditors [accounts payable]

In truth, you will require enough funds to keep your franchise up and running until you begin to make your money back. This means having sufficient working capital to pay suppliers and expenses needed for the day to day operations of your new franchise. One benefit you have is the experience and knowledge of your franchisor, who should be able to advise you on exactly how much working capital you’ll need to begin with and where this sum will be spent over the foreseeable future.

On-going Fees including Management Service Fees

For you to truly receive all of the advice, guidance and support offered by the franchisor, you’ll need to expect to pay an MSF, also known as a Management Service Fee or Management Support Fee or Royalty Fee. Depending on your franchisor, there are one of three ways in which your MSF can be calculated:

• Fixed Fee – This means that your monthly fees to your franchisor will not increase unless stated in your franchise agreement. The benefits to having a fixed fee monthly payment through your franchise are that it allows your franchise business to mature, as you will pay the same standard fee as your franchise business grows and expands.
• Percentage based fee – These usually occur with larger franchise groups where you should expect significant growth during your franchise tenure. Percentage based fees are paid monthly in arrears based on the turnover of your franchise business. It is common for Franchisors to insert a minimum fixed management service fee or percentage, whichever is a great fee. This is an insurance policy for the franchisor just in case you underperform and do not follow the correct procedures.
• Product based fees – You’ll see this version imposed often within the franchise retail sector or product based franchise market. This is simply where the franchisor will make a margin on the wholesale items that you are purchasing from them to run your franchise.

Franchise Marketing Fees

These we’ll typically go into a larger ‘pot’ for the whole franchise network and will go towards a national or international marketing campaign to support the franchise brand and in theory generate further business for the franchise network. If your franchise fee doesn’t outline an advertising fee then you may be required to undertake individual marketing at a local level to promote your franchise within your own territory.

Franchise Renewal Fee

Franchise agreements typically run from 5 or 10 year periods and if you would like to renew your agreement after your initial term then a ‘renewal fee’ may be incurred. This will be stated in your original franchise agreement if that is the case.

Franchise Resale Fee

The time will come when you’ll eventually look to sell your franchise, be it through retirement or the fact that you’ve made enough money! When this scenario arises, you’ll typically be required to pay a small fee to the franchisor to cover the costs of approving the new franchisee within your franchise territory, franchise training and support for the new franchisee.

Professional Services Fees

We strongly advise that you seek professional assistance when looking at purchasing a franchise, this could be in the form of an accountant, franchise consultant or franchise lawyer to ensure the franchise agreement is up to scratch. These potential advisory fees should be calculated within your overall franchise fees too.

If you have any questions at all regarding fees involved with acquiring a franchise then please do not hesitate in making contact with the Franchise