Starting a franchise can be both exciting and scary. While you’ll have the support of an experienced franchisor, it’s important you plan effectively for your new venture. Here, we’re exploring the true cost of starting a franchise and the factors you should consider when creating a franchise budget.
Most prospective franchisees are aware of the franchise fee they’ll need to pay in order to access a business opportunity. You may also have heard about royalties, marketing funds and insurance. But there are other costs you might not have previously considered.
By understanding the full cost of franchising, beyond the franchise fee, you can budget properly and pave the way for success.
What does it cost to start a franchise?
Here are some of the ‘hidden’ costs you will need to fund when you become a franchisee:
1. Property fit-out
The cost of refurbishing and furnishing a business premises will vary depending on the original state of the property, so franchisor estimates for ‘fit-outs’ may be slightly inaccurate. For example, adapting an existing restaurant into a cafe under a different brand will be significantly less expensive than transforming a neglected site into a safe and hygienic eatery.
Don’t forget to consider the costs of putting down a deposit and buying or renting the property, as well as gaining permits and hiring contractors and interior designers.
2. Legal services
Some franchisors hand over the fees for legal tasks to their new investors when launching a new franchise unit. They’ll need to write up or tweak contracts and disclosure documents with the guidance of a solicitor, so be sure to ask about legal fees before signing on the dotted line.
3. Equipment and maintenance
The franchisor will probably include the cost of buying equipment when disclosing the total unit ‘start-up’ amount, but you may not have thought about the process of maintaining it. Once you’ve launched your unit, you’ll need to make sure everything stays in good condition and safe to use.
When items break or become damaged or outdated, you’ll need to shell out for new equipment.
>> Read more:
- Franchising 101: The Official Franchise Start Up Checklist (Part 1)
- Franchising 101: The Official Franchise Start Up Checklist (Part 2)
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- Franchising 101: 8 Signs You're Ready to Start a Franchise
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Franchisors want to maintain consistency across their network, so they often give investors a list of approved suppliers. While some manufacturers may be willing to negotiate deals for products if multiple franchisees are putting in large orders, being limited to particular suppliers can be restrictive. You may not be able to buy from the wholesalers offering the best value for money.
5. Staff onboarding
If you need to hire employees after starting a franchise business, it’s important you budget for a high-quality onboarding programme. You’ll need to prepare everything from paperwork to a training and mentoring system, which can introduce unexpected costs.
Of course, the better your onboarding process is, the better your staff are likely to perform, so your investment should be repaid in the long run.
>> Read more:
- 5 Advantages of Franchising for Young People
- 9 Things to Know Before Becoming a Franchisee
- Mythbusters: Common Misconceptions About What Makes a Successful Franchisee
- 5 Great Reasons to Become a Franchisee
- Franchising 101: Are You Ready to Become a Franchisee?
- Franchising 101: 6 Things to Know Before Becoming a Franchisee
6. Staff salaries
Paying wages can take a big chunk out of your monthly budget. In fact, 33 percent of bosses say they were surprised by how quickly the costs accumulated (AXA), so it’s vital you factor them into your plans.
You’ll need to do your research and determine a reasonable salary for your workers - enough to retain talent but not so much you eat through your budget too quickly.
You have also got the employer’s National Insurance; that is the element that the business has to pay on behalf of the employee. But, quite often, that is not necessarily factored in, particularly when the franchisees are starting out. - Desirie Lea, Morris & Co Chartered Accountants Director
Depending on the type of business you start, you may need to travel across the country or even make international trips. You’ll probably rack up bills for transport, accommodation and food, and these can quickly build up if you’re away for more than a day or so.
Even if you don’t need to travel to clients or complete site visits, the franchisor could ask you to attend trade shows, conferences or socials. So, it’s a good idea to ask about travel before investing.
8. Socials and employee gifts
Often, business owners come unstuck when they want to celebrate a great year with their staff. They get to December, go to organise a memorable bash and realise they haven’t put aside enough money to fund it.
According to a survey, UK businesses spend between £8 and £37 per employee on their work Christmas party (Savoy Stewart). And if bosses like to reward hard work with the occasional round of gifts too, costs can quickly add up.
9. Transport maintenance
Although this factor won’t affect every investor starting a franchise unit, it should be a key consideration for anyone launching a mobile or van-based business. Keeping vehicles in tip-top shape means paying for regular services, as well as washing and waxing.
Plus, there are rising fuel prices to think about. Although changes in price may be gradual, it’s a good idea to expect to pay more over time.
10. Office supplies
Whether you have a home study or a huge office of employees, you’ll need to consider the costs associated with work supplies. From printing accessories and stationery to kitchen staples like tea and coffee, there’s a lot to think about when you run a business.
Creating a franchise budget
So, how can you understand the full cost of starting a franchise unit when you go to create your budget? You can improve your chances of developing an accurate forecast by doing your homework.
Talk to your franchisor and existing franchisees to see how much it has cost to set up other units in the network. Review the franchisor’s financial projections and then validate them with your own calculations.
Once you’ve created forecasts, it's worth seeking guidance from an accountant with experience of franchising - even if you're confident with the numbers you’ve generated. Financial consultants will be able to provide an unbiased, realistic perspective on the viability of your future business.
Then, add a certain amount of working capital on top of your final calculations. Business owners should always have cash in reserve, just in case of unexpected issues. You won’t be making a profit when you first launch your franchise unit, so you must be able to fund all the added costs with your own money.
For a step-by-step guide to creating a franchise budget, see our dedicated article on the subject.
Alice Tuffery, Point Franchise ©