Before you invest in a franchise, it’s important to get as much financial information as possible so you can get a realistic idea of how much you could earn. This means that you have to weigh up potential income versus the costs involved before you’ve even come close to signing a franchise agreement.
Plunging into a new business venture requires plenty of patience and forethought. That means more than just sleeping on it overnight. You need to anticipate all of the challenges of the proposed business model and work out if it is the right fit for you. To help you think clearly, let’s have a look at some of the questions you should be asking yourself before starting a franchise:
How much funding do I need?
Each franchise places its own price on its franchise opportunities. They will determine the franchise fee on the basis of things like the status of the brand and the earning potential that it offers to franchisees.
Here on Point Franchise, we have franchise opportunities available that come in at a range of different price points. Let’s have a look at some examples:
• World Options. This delivery franchise is offering franchise opportunities that require a total of investment £32,500 (plus VAT). In return, you will receive the backing of a franchise model that has proved successful for 72 existing franchisees.
• Century 21. With fifteen years of experience in real estate, Century 21 has grown into one of world’s largest residential estate agency brands. Franchisees that want to get their cut of the action will have to cough up a total investment of £100,000.
• The Avocado Show. If you think that you can handle one of the hottest properties in the food industry, then The Avocado Show might be the franchise opportunity for you. This hit brand demands £400,000 worth of total investment from its franchisees they want to capitalise on the favourite fruit of hungry millennials.
Evidently, there is plenty of range when it comes to franchise costs. That’s what makes it difficult to give a general idea of how much funding is needed to start one. That being said, you should generally expect to be investing tens of thousands worth of capital into a new franchise venture.
What sort of finance support is available?
Many franchisors will have good working relationships with banks that have expertise in lending to franchises. The larger and more established the franchisor, the easier it may be to secure funding at preferential rates so you can minimise your costs in the long run.
Here are a few things to consider when seeking finance support:
- Your working capital costs
- Your expansion goals
- Hidden costs like VAT
Typically, banks won't lend more than 70% of the franchise start-up cost, as they want to make sure that they’ll make a return on their investment.
If you have enough cash, you may be tempted to fund all of the investment yourself. However, this will expose you to much more significant financial risk, as there's no guarantee the business will be successful. Plus, it’s likely that you will have less working capital to live off before your franchise becomes profitable and you can start drawing a salary from your revenue.
What are the benefits of taking out a loan?
Remember that the more you borrow, the more interest you’ll need to pay back. However, when you finance part of your franchise with a loan and pay it back on time, you may be able to boost your credit score.
This could make it easier to get funding in the future, as a higher credit score could make you eligible for lower interest rates, whether you’re planning on financing another business or applying for a mortgage.
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What are the costs involved?
The Franchisee Fee
A franchisor usually charges an initial franchisee fee to anybody that wants to carry the name of its brand. Depending on the franchise, the cost may be demanded upfront or spread over the franchisee’s first months of trade.
A franchise fee grants franchisees the permission to use the franchisor’s trademark, products and logo. Though they vary depending on the size of the parent brand, they typically cost thousands of pounds.
But don’t let that put you off. By joining a recognised franchise, you are saving on the investment required to build a brand name for yourself. That can take years and often costs much more than a one-off franchise fee.
Your franchisor may also charge a monthly royalty, otherwise known as the ongoing management fee, in exchange for ongoing training, support and other services. This should be stated on the franchisor's website or in the brochure.
Check how the franchisor’s royalty fee compares to other franchises in the same sector so you can determine whether this seems too high (or worryingly low). Depending on the franchisor and your business plan, you may be able to negotiate a lower franchise fee or a different fee structure before you start the contract, or once your business becomes profitable.
How much will my franchise earn?
Many franchise brands will publish estimates of how much a franchisee can expect to earn over their first two years of trade.
This data must be based on real earnings reported by the network's current franchisees. As you might expect, the franchisor will want to make the best impression. To do that it will focus on the network’s best-performing businesses.
When you see the phrase ‘up to’, remember this means you could earn the stated amount if you’re willing to put in enough time and effort. This may mean making some decisions that you don’t want to make, such as:
- Doing more hours than you’re prepared to
- Moving to a prime location
- Employing more staff
This is why it pays to be slightly sceptical when it comes to profit projections. When faced with them, always keep in mind how you want to run your franchise brand; it can have major implications for the profitability of your business.
Also, it is important to bear in mind that start-up costs will have a significant impact on how much you earn in the first few years. When all of these are added up, your franchise might not even be able to break a profit in its opening year.
Once again, this varies depending on the kind of franchise you want to invest in. Starting a van-based franchise, for instance, is a great way of saving on start-up costs as you won’t have to pay for an expensive office/commercial premises.
Generally speaking, the lower the minimum investment, start-up costs and working capital requirements, the earlier you can become a profitable business. However, a franchise with a low investment cost will often generate a more humble income, as the concept is often quite simple, meaning you’ll need to expand if you want to make some seriously big bucks.
How long before my franchise makes a profit?
It may seem a little direct at first, but this is one of the most critical questions to ask your franchisor. If you're financing a substantial proportion of the business with your own money, you'll need to know when you’ll start breaking even.
Your franchisor should provide a clear projection of when your business should start making a profit, based on the performance of the network's existing franchisees.
This varies massively between industry and even between franchises in the same industry, so it’s virtually impossible to offer a general ballpark figure. However, virtually all franchise opportunities will take at least a few months before they begin generating profit, with some even taking years.
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How can I be sure that I’m getting a good franchise deal?
There are a few things you can do…
• Get in contact with the franchise. While all franchise brands should provide objective financial information on their websites, it’s still a good idea to ask this question directly to franchisor to make sure that the figures are accurate.
If there is a discrepancy between the numbers advertised on the website and what is stated in the interview, this should cause concern. It may suggest the franchisor is not being transparent about the financial requirements or the earning potential of the opportunity.
• Seek out independent advice. If you’re new to this sector and haven’t run a business before, it can be easy to underestimate the cost of opening a franchise. That’s why it’s essential to get independent advice from solicitors with expertise in the sector.
They’ll be able to run through the contract, highlight any potential issues, and answer any questions you may have about your investment and the risks involved. To ensure you receive the best advice, always hire a solicitor that’s been approved by the bfa.
James Muddimer , Point Franchise ©