What is the real cost of owning a franchise?
In addition to the initial investment there are other costs involved in owning and operating a franchise. Here Derin Clark looks at some of the other expenses potential franchise owners need to take into account before launching their business.
When looking at franchise opportunities, a few people make the mistake of viewing the initial investment as the total amount it will cost to own and operate the business.
The initial investment is, in fact, the minimum amount of money needed, which is usually the liquid capital required to launch the franchise. The true cost of the franchise is usually much more.
Due to the large variety of franchises available, it is impossible to say how much more money will be needed to successfully launch and operate a franchise. Everything – from whether it is a home-based franchise or one that requires premises, to how many members of staff is needed and which suppliers are used – will have an impact on the overall cost of the franchise.
Although you may feel that the initial investment is misleading, franchisors expect prospective franchise owners, who are seriously considering owning a franchise, to have done enough research to be aware of the other costs involved.
The initial investment
At its most basic level, the initial investment should cover the use of the franchisor’s trademark, intellectual property rights, and access to the operations manual.
As the essence of franchising is buying the rights to trade under a brand name and using its business model, you should expect to pay more for the rights to use a household name, such as Domino’s Pizza or Subway. Alternatively, be cautious of paying a lot for a relatively unknown brand name.
Sometimes the initial investment is covered in the franchise package cost, however this mainly includes initial and ongoing training, stock, marketing materials to launch the business, and support services.
A breakdown of what is covered by the franchise package should be included in the Franchise Agreement. If this is not done, ensure that you ask the franchisor to provide you with the breakdown so that you are completely clear about what is included.
Although what is provided is similar across all franchises, the cost of the franchise package varies as it is affected by the quality of what is included, for example a franchise may charge a higher investment fee because it is providing more support and a longer training programme than one charging a lower fee.
Other start up costs
When launching your new business, you will need to pay other start up costs on top of the initial investment and franchise package. These costs vary depending on the type of business that is being launched and the amount of equipment needed to operate the business.
Additionally, you will need to take into account what is included in the franchise package, for example some franchisors will provide initial stock to help you get your business started.
Whatever is included in the franchise package, all new franchise owners will need to pay some start up costs. Even if you are operating from a home-based office, you will be required to purchase basic office equipment such as a suitable computer, desk, chair and filing cabinets.
If it is a vehicle-based franchise, you will usually be expected to either buy or lease the equipment needed to operate your business. For example, if it is a garden maintenance franchise you will need, at the minimum, basic gardening tools.
Franchises that are operated from premises, such as those in the retail or food and drink sectors, often have the most start up costs. This is because you will need to rent or purchase suitable premises, pay for the fit-out, buy stock and equipment, and ensure that you have the appropriate uniforms for staff.
Once you have your business up and running you will have expenses that, although essential, are not immediately obvious. Often referred to as ‘additional costs’, these can include everything from insurance on a rented property to purchasing new stock.
Utility bills will also factor into additional costs, as you will have to pay for electricity, heating and water to keep your staff and customers working and shopping in a comfortable (and legal) environment.
If you are operating your business on your own from a home-based office, you will not be immune to these costs. Not only will your utility bills increase – due to being at home all day – but you will also have to pay accountants fees, tax and other administration costs.
As part of the Franchise Agreement, franchise owners are normally expected to pay ongoing franchise fees. This is usually paid on a monthly basis as a percentage of your turnover.
The franchisor should use this money towards providing ongoing support and training, as well as marketing campaigns. Like the franchise package, the cost of the ongoing fee should reflect the quality of the support, training and marketing the franchisor provides.
Before signing a Franchise Agreement, you should ask both the franchisor and existing franchise owners in the network about the cost of the ongoing franchise fee and what you receive for your money.
If the franchisor doesn’t provide value for money, it is advisable that you seriously re-think about whether this is the right franchise opportunity for you.
Within the first year of launching your business, it is highly unlikely that you will make a large profit. To ease your financial pressure, it is essential that you have enough money available to live on during your first year of trading, and longer if possible.
This money will need to be enough to cover your mortgage, bills, food and other living expenses for the year; enabling you to concentrate on making your business a success rather than worrying about paying next month’s mortgage payment.
Most new business owners will need to borrow some money to get their business up and running. You cannot launch the franchise through borrowed money alone however, as to be eligible for a loan, you will need to prove that you have liquid capital available.
Fortunately for those looking at franchising, many banks are more willing to lend to people wanting to launch a franchised business than other types of business start-ups. This is because franchising has a higher success rate and, as a result, many banks, including Lloyds TSB, NatWest and HSBC have specific departments dedicated to franchising.
There are also some companies that deal with helping people to get loans to fund their franchising plans. Independent finance brokers provide a range of services to help franchise owners secure loans, work with you to create a credible business plan and approach banks on your behalf.
If you are serious about owning a franchise, don’t be put off by the extra costs involved in running a business.
As long as you have prepared and planned to have enough funds to cover all your costs you should not run into financial difficulties.