How Much Should I Pay For A Franchise?
The time has finally come for you to consider your own business then!
First of all, just the small matter of finding out what options are out there. You might feel a little overwhelmed, as there seems to be an endless number of options to think about. Then there is the realisation that you might well be leaving some form of security that is your current employed position. Often defined as the ‘employee trap’. Finally it will come down to the financials and questions like, how much should I pay for a franchise?
The Franchisor Will Benefit Hugely From Your Knowledge And Experience, Right?
Many potential franchisees look at the cost of a franchise as the fee that’s being marketed as the Franchise Fee. This might be £10,000 to around £30,000. However, this is not the total true cost of any particular business as there are many other costs required. Let us consider those in this short report.
What Is A Franchise Fee?
Having looked at plenty of franchise opportunities, you’ll come across reference to this fee on every franchise option you’re looking at. But what is it actually for? It might feel like it is a made-up figure to line the franchisor’s pockets at times! However, careful consideration should be taken to the value of this initial fee.
For a start, it is the very first hurdle you will need to overcome to be part of your chosen franchise. And the franchisor will be closely watching your ability and speed to pay said fee.
This figure should be looked at the cost to the franchisor of helping you to get launched. Areas that need to be paid for from your franchise fee will cover your initial and ongoing training, initial and ongoing support obligations and site selection assistance (if you are looking at a bricks and mortar franchise).
A fee that the franchisor deems worthy to give up their own rights to compete with you, as you will be granted a degree of exclusivity. Then, depending on the franchise, there may well be a longer list of what is included. You should ask for some clarity of what exactly is included of course!
Any Franchise Fee can be small or large, this really depends on the franchise format. A well-established brand can command tens of thousands, whereas a work from home, mobile type business that is looking for early adopters might only set you back several thousand typically.
Professional Fees To Consider
You should obtain some professional assistance when you are looking to purchase a franchise, especially if this will be your first time in business.
You might well see some terminology in some franchise packs that make reference to commonplace phrases used internationally, and this might well throw you for a UK based franchise. Let us try and clear this up for you now: the UK is an unregulated market for franchising, whist there is not time to consider the why’s and wherefores of this in this short article, you might see references to a FDD or ‘Franchise Disclosure Document’. These are documents that will report on many areas useful to you as a potential franchisee. But at the same time, do not be concerned if you do not get access to, or offered one. There is zero legal required in the UK to produce one!
Most UK brands would not produce an actual FDD but would instead ensure you have as much detail on the franchise as possible. So you are able to make an informed choice down the line.
Professional help is also advised. You might find one of the clauses in the franchise agreement, that you will come on to at a later stage, will require signatures to confirm that you have sought independent professional help anyway. Look at any accountant and legal fees as an investment rather than cost!
Additional Cash Requirements To Run Your Own Franchise
Think about any considered purchase you have ever made in your lifetime. For most of us this will probably be a house, or car, buying that asset was just one part of obtaining it wasn’t it!
Then there is the ongoing cost of taxes, insurances, maintenance, repairs and so on. Any franchise should be looked at as the same, although it is fair to point out that business should actually generate revenues to fund some of these. Working capital, or cash, is the lifeblood of any business. Many, many businesses do not fail because they are not profitable, they simply run out of cash! Ensure you are adequately funded to cover this aspect. Again, you might well be signing the franchise agreement to declare as such!
For Retail Based Franchises, Also Consider…
Once a site is soured and verified by the franchisor, next you will need to look at the fit-out costs. These can be quite considerable on some larger square footage formats. And also need to include several areas that need to be paid for. Your franchisor will often create an outline guide per square metre. So you have some indicative costings. As well as advise on how much can be secured against bank or asset finance options. So the need to part with hard cash becomes less severe.
Once this is all confirmed you will also incur additional costs for ongoing supplies. This is especially true with food and beverage franchises. With these, you will be expected to carry initial stocks to open your store. These can often be provided on credit terms so can be funded through your turnover. However, we make the assumption that you are taking enough to cover these costs, which is not always the case for a new store opening in a new location!
Finally, Think About You And Your Family…
Please do consider the cash you require personally, or for your family, to look after your own fixed costs while you undertake the franchisor training. Or while the business takes time to become established and able to pay you a wage! The last thing anybody wants is you being under pressure financially and then it is affecting your ability to perform.
Franchising can for sure, help you get a step closer to owning and running your own business. But be aware and plan for all costs before you totally commit. Do this and you will be well on your way to a higher chance of success!
Richard Pakey is a franchising expert and Managing Director for the award winning Lime Licensing Group and can be contacted in the following ways:
Mobile/text/whatsapp: 07904 697591