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What to Expect When You're Paying for a Franchise

Opening any new business can be fraught with unexpected expenses. Luckily, franchisees can relax in the knowledge of where their carefully invested money will be going.Financing1.jpg

On Franchise Direct, we list each franchise with the minimum investment you would need to open a particular business.

Below is a list of expenses that are common to experience when starting off. Each franchise is different and some will have a different focus on different costs, i.e. if you open a clothes franchise the purchase of stock will be much higher than the amount of stock a business consultant would need.

The initial franchise fee

This fee will depend on the structure of the franchise package. In its simplest form, the initial fee includes services to assist with start-up, initial training and the purchase of the franchisor's "goodwill" along with the right to use the brand name. In more complex franchise arrangements the franchisor may acquire and fully equip the premises and, upon completion of the franchisee's training, hand over the "key" to the franchisee. This is called a turnkey operation and the initial fee is based on the cost of the elements included in the package, including training, plus a mark-up for the franchisor. Since the beginning of 2012, we have noted that many more franchises are offering easy payment terms, whereby you only pay a portion of this and a percentage later on. Check out our Exclusive Offers page for more information on franchises like this.

Capital investment

The franchisee must also fund the fit-out of the business in accordance with the specifications of the franchise package. For the job franchise this may entail little more than the purchase or lease of a van or truck and some small items of equipment. In some of the large retail franchises, however, the securing and refurbishment of premises and fit-out can represent a sizeable cost for the franchisee.

Working capital

A franchise business is no different from any other in that the franchisee will have to fund the initial start-up expenses until revenue from customers builds up. You will, however, benefit from the learning experience of the franchisor and the other franchisees, and will have a more accurate picture of working capital requirements. In addition, the recognised brand name of many franchise systems often results in faster customer acceptance of the product or service in question.

Continuing fees

The management services fee you'll pay to the franchisor provides their income. These fees can be a fixed amount, but it is much more common for ongoing fees to be a percentage of turnover - not profit. You may also have to pay into to a marketing or advertising levy which funds the cost of national marketing and advertising for the network. This is where working under a known brand becomes really valuable.  If the franchise doesn't have a national strategy, you will need to look after your own advertising.

Finance2.jpgMiscellaneous Expenses

It may be a phrase that drives fear into the heart of accountants and business people around our lovely but unpredictable planet, but these are something to consider when talking about expenses. In the UK, franchise contracts are based on normal contract law, so you really should take legal advice before you sign. It's not unusual for these contracts to be stacked in the favour of the franchisor, so make sure you look after your own interests and make sure there isn't a hidden clause to sign away your first born.

Chances are, in the first few weeks or months you may not be making a huge amount of money. It's important to remember that you still need to eat in the early days, so try and have some savings, or a plan arranged with your spouse or family to cover living costs early on. Set some money aside, you may not need it but it's always better to be sure you can focus on running your new business.

Any prospective franchisee should carefully assess all of the above costs and on-going fees when evaluating a franchise to ensure that he or she will receive an adequate financial return from the franchise system in question.

We've put together an ebook for anyone considering becoming a franchisee, with a section on financing and securing funding for your new venture. Download our Pocket Guide to Franchising.

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