How much will buying a franchise cost me?
Many franchisees make the mistake of rushing into the purchase of their business without taking the time to make themselves fully aware of the costs involved. Here is a guide to what you should know, before you sign on the dotted line.
The cost you outlay will depend on whether you are buying an existing or new franchised business.
Generally speaking if you buy an existing business, you will be paying to the outgoing franchisee or vendor the sale price of the business along with training fees, potential upgrade costs (depending on whether or not the franchisor requires any works and or equipment to be updated at the premises) and legal fees.
Buying a new franchise may include payment of an initial franchise fee, training fee, fitout costs and the like. Below is a short summary of some of those costs and what they entail:
Initial franchise fee
Your largest expense is likely to be an initial franchise fee, a one-off lump payment that is made when you sign your franchise agreement. This fee gives you rights to use the franchisor’s brand and work within the franchisor’s business model. The initial franchise fee varies from business to business.
Your purchase may also involve the purchase or leasing of premises to run your business from. Don’t be mistaken in thinking that finding the right location and handing over your money is all there is to it – you will also potentially need to cover new fit-out and the purchase of equipment and inventory, as well as branding to keep with the look and feel of the franchise. If the premises are already fitted out, you may be asked to undertake a refresh and or upgrade of the premises.
Following on from branding of your premises, you will also need to invest in advertising and other promotional activities. This is usually in addition to any marketing fee imposed by a franchisor and is considered local area marketing which you are required to undertake in respect of the business.
Franchises are successful when they offer customers consistent service and products. Training may be extensive and may involve courses that you may be required to attend offsite as well as in-house and practical training.
Sorting insurances for your business is certainly not the most exciting pastime however, trying to cut costs by picking the most basic cover can prove costly later. Most franchisors have a minimum requirement for compliance however, regardless of your type of business you should be looking at public liability insurance, business interruption insurance, business and content insurance and machinery breakdown and burglary insurance.
It is essential that prior to considering becoming a franchisee that you receive competent professional advice from qualified and experienced advisors. This includes lawyers and accountants who understand franchising.
Ongoing franchise fee
This fee often takes people by surprise so make sure you know what you’re getting into. An ongoing franchise fee (or royalty fee) enables you to operate under your franchisor’s name and within their franchise system. It also gives you access to goods and services specific to your franchisor (for instance, KFC’s secret herbs and spices).
Like the initial franchise fee, the cost of your ongoing franchise fee varies depending on the business. Ongoing franchisee fees can be a monthly fixed fee or calculated as a percentage of total turnover.
An advertising or marketing fee is also a common requirement of many franchise systems. Franchisors usually need to set up a marketing or cooperative fund and will determine the amount franchisees are to contribute to the fund. Like the royalty fees, the marketing fee is usually paid monthly.
As with every business you will need a fair amount of working capital in order to finance your operations. The amount of working capital required varies for each business however you will need to ensure that you have sufficient funds to enable to trade and pay creditors.
For more information about the costs associated with buying a franchise or for a review of your franchise agreement, please contact Racha Abboud.