Buying into a franchise can be a really low cost and low-risk way of dipping your toe into the business world – and, if you choose the right one, it can also be incredibly lucrative.
While tapping into a franchise is almost always cheaper than starting a new business from scratch, there will almost certainly be some costs involved.
Putting a price on freedom
Lots of people dream of handing in their notice and branching out on their own, but the risk of losing everything is often a deterrent unless you have deep pockets.
Franchising removes a considerable chunk of that risk by allowing you to buy into a brand that is already established and trusted by customers – which is half the battle when it comes to customer-led business.
When it comes to putting a price on getting hold of your franchise business, this can vary greatly depending on the kind of franchise you choose. For example, a franchise that requires bricks and mortar premises will require more of an investment than one which can be run from your home.
In this article, we’re going to take a look at the kind of financial outlay you can expect when getting into the franchising game.
The Franchise Fee
Most franchise businesses will require you to pay an initial fee to secure your new business.
This fee will usually be paid upfront on the signing of a contract and can vary widely depending on the business – in most cases, the fee will be anywhere between £500 and £300,000. Often, this franchise fee will include essential onboarding and training to help you get started as well as guidance and support.
Some examples of UK franchise fees are:
As you can see, initial fees vary widely. While a franchise such as Maplebrook Wills may be within reach, a Starbucks franchise will only be within the realm of possibility for those with considerable capital behind them.
When it comes to paying your franchise fee, many franchisors will expect you to have a percentage of the fee available from your own funds and permit you to raise a limited amount through funding. This is an important factor to consider and may mean that you will have to delay your franchising ambitions for a little longer while you save up the capital.
While paying your franchise fee will secure your franchise business, that’s only the start of the story. Once you’ve paid your fee and signed on the dotted line, you’ll then be required to meet set up costs which can include:
Premises – If you’re buying a franchise license for a business that requires premises that are open to the public, you will need to make sure that you have enough capital to first source and secure a property and then to make rental payments. You’ll also be responsible for paying bills for the premises such as utilities.
Employee wages – If your business requires you to employ staff, these wages will need to be factored into your budgeting.
Tools and equipment – Some franchise businesses will require you to pay for any and all equipment necessary for you to run your business. For example, a car valet franchise might require you to either have your own van or to rent one from the company at your own expense.
Product and supplies – When joining a franchise, the brand will have established suppliers for its product or materials and supplies, and you will be required to use these suppliers to buy these things at your own expense.
Legal fees – During the setup process of your business, you’ll need to seek and secure legal advice and, yep, you’ve guessed it, this is coming out of your pocket.
Insurance – All businesses need to be insured and, you’ll be responsible for making sure that you have all the necessary coverage for your premises, product and staff.
Advertising and marketing – Once your business is up and running, you’ll need to pay to promote it to make sure that you attract those all-important customers.
Management fees – You’ll be responsible for paying management fees (sometimes known as an ongoing fee) to your franchisor, and this can either take the form of a flat fee or, more commonly, a percentage of your takings.
Renewal fees – Your franchise business contract will usually cover a set period of time, after which, if you wish to continue, you’ll be subject to a renewal fee to the franchisor.
Living expenses – It will usually take between three to six months for you to establish your franchise business and start making money. Therefore, you’ll need to make sure that you have enough in the bank to cover your living expenses, such as rent/mortgage, bills, food and travel.
As you can see, the initial franchise fee is only the beginning when it comes to your franchising outlay and, a lot of franchisors will require you to show evidence that you have enough cash to cover all of these setup costs as well as your living expenses before agreeing to your franchise.
To give you an idea of what you may be getting yourself into, the average UK price to buy and set up a franchise business is around £42,200. Having said that, in a lot of cases, this will be much, much higher depending on the extent of the franchise fee and set up costs. For example, if you’re looking to score a hole in one by grabbing yourself a Dunkin’ Donuts franchise, you’ll be looking at forking out a cool £3 million altogether to achieve this.
Paying for your franchise
Now that we’ve gone through some of the costs involved, this may seem a little daunting, but it’s not all doom and gloom, as there may be help available.
Franchisor support – Many forward-thinking franchisors offer help to franchisees in gaining the funding they require to start up their business. This can be invaluable for those who are entirely new to starting and running their own businesses.
Banking on success – If you’re buying into an established and well-known franchise, there’s a good chance that you’ll receive a warm reception from the bank manager when looking for funding for your business. The simple reason for this is that an established franchise is a much safer bet for a bank than a new business started from scratch.
When searching for your new franchise, you’ll most likely come across a few that are offering rock bottom franchise fees. While these may seem tempting, bear in mind the old saying – if something looks too good to be true, it usually is! Some sneaky franchisors will reel you in with a lower than low fee, only to serve up a sting in the tail in the form of astronomical management costs. As with any investment, it’s really important to make sure that you know all the facts before going ahead with a deal.
As the old saying goes, you have to speculate to accumulate; which means that you can expect to make a significant investment to start up your franchise.
Although franchising can be relatively quick and easy to set up, it’s not a free ride – to begin with, you can expect to have to do the bulk of the heavy lifting yourself and will almost certainly be working long hours while you establish yourself. The good news is that if you’re prepared to work hard, you can expect to recoup your investment within six to twelve months and go on to enjoy significant profits from your business.