If you’ve ever considered running a franchise, the first thing that probably comes to mind is what it will cost. This can be discouraging, and there are many people that never pursue their dream of becoming a franchisee because they’re not sure about all the associated costs and whether they can finance it. So, we’re here to demystify the world of franchise costs and help you on your way to starting a franchise.
The franchising industry is full of opportunities for budding entrepreneurs. Today, there is a place for everyone in the sector; for example, 18 percent of franchisees are under 30 and 37 percent are women. What’s more, four in 10 franchised businesses can be run from home.
On the whole, this is a hugely profitable industry. Six in 10 franchised units generate a revenue of over £250,000, while the entire network of UK franchise businesses turns over more than £17 billion. Today, we present our complete guide to franchise costs in the UK, split into three main sections: start-up, day-to-day operations and business growth.
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1. Franchise start-up costs
Franchise opportunities come in all shapes and sizes, and do not always require a big upfront investment. Franchise start-up costs can vary hugely depending on the size, type and location of the business but, according to the British Franchise Association (BFA), the average cost of establishing a franchise business is £42,200. This includes the cost of franchise fees, working capital, stock and equipment.
Of course, the most successful franchise businesses require the highest costs; for instance, you’ll need to make a total investment of around £3 million if you want to join Dunkin’ Donuts. However, there are plenty of fantastic franchises that offer licensing agreements for just several thousand pounds. Just be wary when considering cheap franchise opportunities, as initial set-up costs can also be an indication of the level of support you’ll receive from the franchisor.
- The franchise fee – This is the initial payment you make when you first buy the franchise and it goes towards the support you’ll receive from the franchisor. This could include your training, as well as guidance with site selection, territory analysis and staff recruitment. The fee is paid up front and ranges from £500 to £300,000, depending on the franchise brand. As a rule, the initial fee is between five and 10 per cent of the total investment, but it can be as much as 40 or 50 per cent.
- Set-up costs – The set-up cost covers a whole range of different expenses, such as refurbishment, interior design and the purchase of tools, equipment or supplies. It’s likely the franchisor will dictate how the unit should look and which suppliers you’ll use, for example, but the cost will fall to you. This is also known as the capital investment.
- Legal advice- You’ll also need to spend money on seeking legal advice during the franchise purchasing process. If you’re in two minds about purchasing a franchise lawyer, we recommend reading another one of our articles here.
This is a substantial franchise cost, but the exact figure you’ll have to invest will depend on the type of franchise you start. If you launch a high street retail business, for example, the cost of acquiring and fitting out a store in a high public footfall location will be substantial. If, however, you’re running a franchise unit from your home, you’ll be able to save a lot of money.
As well as the standard costs and fees of franchising, franchisees will also need to be able to pay the franchisor’s minimum financial requirements if they’re to be considered. It will take a while for a new franchise to start making a profit, so new franchisees need liquid capital to keep their franchise unit afloat in the meantime.
This will enable the business to keep trading in the early days while the business establishes itself. Franchisors can set a minimum net worth, which prospective franchisees must reach before they are deemed suitable to represent the brand.
2. Day-to-day operations
- Ongoing fees – The ongoing fee is also known as a management services fee or royalty fee. This can either be paid as a flat fee or as a percentage of the sales you receive from the franchise. Most commonly, the fee used in franchising is the percentage of sales and is a beneficial arrangement for both the franchisor and the franchisee. The more successful your franchise unit, the more money your franchisor will make. And the more money the franchisor makes, the more support they’re likely to provide.
The level of support and advice that the franchisor gives you is crucial to the success of the business. For this reason, don’t be fooled by a low service fee. This can sometimes indicate the quantity and quality of support you’ll receive from the franchisor. Make sure you’re happy with how much interest in promotion and improvement of the business format your franchisor will take in your business before fees are agreed.
- Insurance – You should also budget for insurance when you’re up and running. Want some more information on this? Click here.
>> Read more:
- How Investing in a Franchise is Worth it
- Franchise Investment: The Good, The Bad and The Ugly
- Invest in a franchise or go it alone?
- 5 reasons to invest in a franchise
- Making your mind up: Top 5 things to consider before you invest in a franchise
- Reasons why you should consider investing in a new franchise system
3. Business growth costs
In order for your franchise to thrive and grow in the local area and beyond, you need to invest in advertising.
- Advertising fees – These cover the cost of marketing and promotional activity for the whole franchise. Each franchisee makes a contribution, which is then put into a pot and used to fund marketing activity for the brand – which you’ll ultimately benefit from. As with other ongoing costs, advertising fees are generally charged as a fixed percentage of the income achieved by the franchise. This is usually no more than five percent of gross sales.
One last thing…
- Franchise renewal/resale fee – If you choose to extend your franchise agreement or sell your franchise, you usually have to pay a fee.
Franchise costs – the summary
All the above franchise costs and fees vary depending on the type and size of the opportunity. Startups recently compared four very different franchise opportunities and how much the total outlay would be for each. Unsurprisingly, the figures ranged massively – from a home-based pet food delivery service with no premises and a single van costing around £11,000 to taking over an existing McDonald’s restaurant costing up to £200,000. There really are franchises out there to suit all types of entrepreneurs and sizes of pockets.
The old saying ‘you only get what you pay for’ is very often true. If the franchise that you’re buying into has a highly perceived reputation, the initial franchise fee will be greater. If you’re just starting out and require a high level of support from the franchisor, the ongoing fees will be increased to reflect the extra effort. For the business to be successful, it’s important that the franchise costs and fees are seen to be fair by all and provide an adequate financial return for both the franchisor and its franchisees.
See more articles in our ‘Franchising 101’ series here:
- What is a franchisor?
- The Pros and Cons of Franchising Your Business
- Franchising and Professional Development
Becky Martin, Point Franchise ©