What Costs Are Involved When Buying a Franchise?

How much does it cost to buy a franchise and what types of costs are involved?

Franchise Finance, Funding and Costs

What Costs Are Involved When Buying a Franchise?

Franchising is one of several ways which entrepreneurs can go about owning a business. Whichever route to business ownership you choose; there will undoubtedly be costs involved. However, which route you take will determine how much you pay to set up and run the business and what types of costs need to be considered.

One such route to business ownership and one that is frequently recognised as a more successful choice, is franchising. There are a number of costs involved with buying a franchise, both initial investments and recurring fees, but despite this franchising is still widely considered as a more secure choice. In fact many banks favour franchising thanks to its higher success rate, often able to lend up to 70% of the franchise investment leaving investors to concentrate more finances on other costs and working capital.

Why Invest in a Franchise?

When looking to run a business for yourself, you’ve generally got three immediate options to choose from. You can either

  • Start up a business from scratch,
  • Buy an existing business or a franchise resale, or
  • Invest in a franchise, a quick launch style method of running a business but under an already-established, proven brand name

With starting up a business from scratch, it won’t escape your notice that frankly, you’re on your own. If you have experience of owning and running a business, starting up a business from square one might not sound as daunting. But the prospect of having to design a brand and establish a business including supply chain and partners, can easily intimidate. Buying an existing business bypasses a lot of the mistakes you’d make in the early stages, but you’re still on your own and the upfront cost can be staggering. With this route, you’re not just buying a business, you’re buying the hard work the previous owner has put in too. Franchising gives you the best of both worlds in that you are still building up a business in your area, but it’s one that has already proven successful elsewhere. Franchising enables entrepreneurs to purchase the rights to trade as a business in their own area, following a proven system of operation. All franchisees follow the same rules, branding and regulation and it is this consistency that makes franchise networks so successful.

The Costs Involved in Franchising

Of the three routes to business ownership outlined above, franchising will usually work out cheaper initially. Ongoing, there are a number of factors at play which will determine overall just which actually the cheaper option is, let’s take a look at the costs involved within franchising.

Initial Franchise Fee

Also referred to as the initial investment, the franchise fee is the first cost associated with buying a franchise. This usually covers access to the brand plus the advice and training of the franchisor. By paying a franchise fee, you’ll also get access to the franchise network’s partners and suppliers where necessary. The franchise fee is also the most variable cost, in that the amount you need to pay will depend greatly on the type of franchise. Some cheaper types of franchises like vending and home based, may only require an initial investment of £10,000 or less. On the other hand, with restaurant and high street retail chains, this figure is likely to be in the region of £150,000 – sometimes more.

The initial franchise investment will usually cover your equipment, starting stock and launch marketing as well. You’ll also get access to support with territory analysis and staff recruitment.

It is a good idea to speak with the franchisor to understand exactly what you get for the initial franchise fee.

Franchise Start-Up Costs

Startup costs will involve starting stock and premises décor and fit out. This may or may not be included as part of the initial franchise investment. If it isn’t, again, this figure will vary greatly depending on the venture, brand and location and size of the premises.

Home based businesses will usually benefit from both low startup costs and low overheads ongoing. By contrast, restaurant and premises based franchises including kiosks will require shop fitting. From seating to counters, kitchen equipment or shelves, start-up costs will typically involve starting stock as well. If the franchise deals in selling products or food and beverage, the cost of initial ingredients and product will be factored in the start-up cost, and you’ll need to take this into consideration when setting aside working capital too.

Franchise Working Capital

Once the business is set up, it won’t be immediately raking in money. It can take months, sometimes even a year to start making money. How long it takes to break even will depend on how much the franchise costs, and how much the business makes. In order to see the business through the months in which the initial investment and costs loom, you need to use working capital.

Working capital is money set aside to continue buying stock, products and marketing in order to continue running the business, until the initial costs have been made back. The amount of working capital you need will depend on the business and how great the ongoing costs are. For franchises that can be run from home, the amount of working capital you need will be a lot less when contrasted with that of a restaurant or fast food franchise. If for example you were running a mobile coffee franchise, your working capital would be used to cover cups, coffee, consumables and fuel while the initial franchise investment is made back. Working capital for a home based franchise might be used to help pay for phone bills, internet, marketing and website hosting.

Franchise Monthly Management and Royalty Fees

Going down the franchising route means you’ll be using the franchisor’s brand, suppliers and proven business model. Continued access to this brand and system of operation is subject to monthly management fees, also referred to as a royalty fee. This figure will often be a percentage of turnover or profit. By paying this monthly fee you will get continued access to the franchisor’s brand and partner network.

Franchisors may also use this to carry out group marketing which benefits the franchise network as a whole, to drive more sales for franchisees. If not, this may be a separate monthly marketing fee. Speak to the franchisor to identify what franchise-specific costs are involved.

Other Franchise Costs

Owning a business means you’ll need to pay a range of other costs such as insurance (business and vehicle if applicable). At the end of the franchise agreement, if you wish to continue you’ll likely need to pay a renewal fee. In a similar manner, if you don’t wish to continue, you’ll need to pay an advertising fee to sell the franchise. If you were to invest in a van based franchise, you’ll also have your vehicle related costs too, such as leasing payments if you don’t own the vehicle yourself. Don’t forget you’ll also need to pay for the costs of a franchise lawyer if you use their services. Franchise consultants won’t usually charge for their support, but it is a good idea to have a franchise lawyer look into the franchise agreement and operations manual before you invest.

Get in touch with the franchisor to learn more about the franchise specific costs. This should form part of your due diligence. Discover a world of franchises at Franchise Planet.

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