Before you begin your search for funding, take some time to familiarise yourself with the range of different costs and fees involved in buying a franchise. Remember that franchise costs can vary greatly depending on the type of franchise and the industry you’re entering into. For example, according to the NatWest BFA Franchise Survey 2015, the average total start-up cost for a hotel and catering franchise is typically around £107,000, whereas the average cost for a personal services franchise is just £42,000.
The first thing you should do is speak to your franchisor in depth about what costs you’ll be liable for, both in the initial stages and later on when the business is up and running. Whilst every franchise is different, there are some standard costs associated with most franchises which you should know about first and foremost. These are outlined below.
The Franchise Fee
The initial franchise fee is the upfront fee you pay when you first purchase the franchise. The fee could range from anywhere between £500 and £300,000 depending on the franchise brand. In most cases, this is a ‘package’ fee which is designed to cover aspects such as:
- Training for you and your manager or team members
- Rights to use the brand name, operating system, and trade décor
- Recruitment of staff
- Specialist equipment, signs, furnishings etc. needed to run the franchise
- Identifying a site and making architectural recommendations
- Analysing the area or locality, sourcing demographic information
- Reimbursing the franchisor for the initial costs involved in turning their business into a franchise
Those who are new to franchising may think of start-up costs only in terms of initial fees and the cost of setting up. In reality, you will need enough capital to keep the business up and running until you begin to make your money back. This means having the funds to pay suppliers and expenses needed for the day to day operations of the 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. Another positive is that, because you are starting with an established brand and business model, you might also find that it takes less time to generate revenue than if you were starting a completely new business.
With all your set up costs, your initial franchise fee, and the required capital to run the business, the final type of fee you’ll need to take into account is the on-going fee. This is also referred to as a management services fee or a royalty fee, and could be either:
- A fixed fee – this is where you pay the franchisor a set amount each month for the rights to run the franchise. This type of fee is not very common in franchising.
- A percentage fee – this is where your fee is based on a percentage of the sales you receive from the franchise. The BFA states that the average percentage for an ongoing fee lies at 11.7% of total sales.
Many franchises use a sales percentage because it is easier for them to calculate when compared to a percentage of profits, which tends to involve a deeper analysis of the outgoings and accounts of the business. A percentage fee is often seen as a positive asset to franchisees – it means that the success of your franchise will also determine how much money your franchisor will make each month. This makes for a powerful incentive for the franchisor to give you on-going support and guidance, so that you can in turn grow your business.
Note: Sometimes there will be no on-going fee charged by a franchisor. This is because the franchisor will make a return through the mark-up of prices for their goods. If you come across a franchise with no on-going fee, make sure you fully understand why this is and what the source of income is for the franchisor instead.
Is there such a thing as a cheap franchise fee?
There are a number of factors which can influence the on-going franchise fee. It’s important to remember that a low fee isn’t always a good thing, and that the recurring franchise fee should accurately reflect the services provided by the franchisor in return, such as training seminars, manuals, advice and visits. As such, if your royalty or services management fee appears to be very low, you should always ensure that you’re happy with the level of support provided by the franchisor in return, before you proceed with signing the franchise agreement.
This is another type of on-going fee which covers the promotional and marketing activities of the franchisor as a whole. This fee contributes to an overall advertising ‘pot’ which is used to promote the brand itself, meaning that all other franchises and brand owned stores will benefit from it on a national level. If you aren’t asked to contribute an advertising fee, for example if there are no other franchises to benefit from a group pot, you may be asked to spend a certain amount on local advertising for your franchise each month. Your franchisor may be able to advise you on the best marketing platforms to invest in for your business, for example print advertising, pay per click advertising or a radio advertisement.
Other costs to be aware of:
Franchise renewal fee
Extending the contract for a franchise may involve a renewal fee. If so, this will be stated in the franchise agreement.
Franchise resale fee
On reselling a franchise, the franchisee will usually pay a small fee to the franchisor, which covers approving the new purchaser, as well as a percentage of the initial franchise fee, intended to cover the cost of training the new owner.
If you plan to use the services of a lawyer, architect or surveyor, be sure to factor this into your budget from the start as it will have an impact on the amount of investment capital you will need to start out with.
The insurance cover you are expected to take out should be explained in the franchise agreement. If it isn’t, speak to your franchisor about the insurance policies you’ll need, before finding out how much these will cost from the respective providers.
Now that you have an idea of the costs and fees, it’s time to prepare to seek funding. In the next section, we’ll look at what you need in order to do this.