Budgeting For Success: Understanding the Cost of Franchising

03/03/2018 16:00 | Start a business

Budgeting for the cost of franchising

Choosing to become a franchisee is exciting and scary in equal quantities. Not only do you have to come up with enough capital to fund your new venture, but when youre up and running, you must navigate the first couple of years carefully to avoid failure. The solution to overcoming both of these challenges is to budget effectively.

If you're not good with numbers, it's vital that you seek the help of someone who is. Thorough and accurate budgeting, not just from a business perspective, but from a personal viewpoint too, is critical to your success. The franchise start-up cost can be considerable and will inevitably impact your budget until your franchise can fund itself.

When considering the cost of a franchise, four main expenses should be budgeted for.

1. The franchise fee

This is pretty straightforward. The franchise fee is what it is. Dont be tempted to invest in a franchise opportunity that you cant afford. Theres much more to the cost of a franchise than just the franchise fee, so you need to consider this.

Similarly, you shouldnt settle for a franchise that you dont have a passion for just because the price tag is right. It may be affordable but running a franchise can involve long hours and hard work. If you dont have an interest in the franchise itself, you wont enjoy the experience, and may even regret buying the franchise in the first place.

Its a balance that you need to get right, but there are thousands of franchises available for investment, so theres bound to be one that suits your interests and your pocket. Remember that the franchise fee funds your training, and the right to trade under the franchise brand, so youre effectively investing in yourself.

2. The full franchise start-up cost

This is a more difficult one to budget for as the total capital investment varies hugely from one franchise to the next. If you choose a restaurant franchise, for example, the expense of leasing the premises, fitting it out to the franchisors specification and buying the necessary equipment will cost significantly more than a franchise that you can run from home with minimal overheads.

As the franchisor will have experience of how much it costs to establish the franchise, they should be able to provide a relatively accurate estimate of what you should budget for. However, for precise representation of the franchise start-up cost you should ask to meet with existing franchisees. They will be able to tell you the difference between expectation and reality and give you a better idea of how much money youll need.

3. Working capital

This is probably one of the most overlooked elements when considering the cost of a franchise. Its easy to forget that, just like any new business, it takes a while to build up a customer base and create a positive cash flow resulting in profit being made.

Again, the franchisor should be able to tell you how long it will take to break even and start to turn a profit, but this should only be used as a guide. Many factors can influence the length of time that it takes for a franchise to become profitable and so you should prepare for the worst and hope for the best. It's recommended that you have at least a year's worth of working capital set aside when you start your franchise.

4. Other fees

The fees you pay don't stop when you sign the franchise agreement. Other costs need to be paid on an ongoing basis. These include the royalty fee (to fund the franchisor's continuing support) and the marketing fee (that contributes towards national advertising campaigns).

And it's not just the franchisor that you have to pay. You'll also need to cover business-related expenses such as rent, insurance, wages and local marketing activities. These will all need to be paid before you can pay yourself a salary, which makes the need for sufficient working capital even more critical.

Don't let poor budgeting be your reason for failing.

The most common reason that franchises fail is undercapitalisation. If you invest in a franchise without a full understanding the costs, you've already put an obstacle in between you and your chances of success. Here are some practical tips which should help you budget efficiently and set yourself up for success:

  • Do your homework When you're considering a franchise opportunity review the franchisors' financial projections and then validate these with your calculations. Again, use the information that you gain from speaking with existing franchisees to give you a realistic idea of what the total investment will be, and when you'll reach the breakeven point.
  • Consult a financial professional Even if you're confident with numbers and spreadsheets, it's worth seeking the advice and guidance of an accountant when you've completed your business forecasts. They will be able to confirm your calculations and provide an unbiased, realistic opinion on the viability of the franchise opportunity.
  • Prepare for all eventualities Even if you've performed thorough due diligence and sought the advice of professionals, there's still a chance that your franchising path may not be as smooth as you'd hoped. Unexpected expenses can occur, delays can cost money and factors outside of your control may mean that it takes longer than you thought to reach the breakeven point. The only way to avoid additional costs being responsible for your downfall is to put aside more capital than you think you need. This can be difficult when youre just starting your new business, but its worth waiting until you can genuinely afford to invest in your dream franchise, or risk your dream becoming a nightmare when the money runs out.
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