Franchise Costs and Fees Explained

03/08/2017 08:00 | Start a business

Franchise fees and costs explained

Buying a franchise can be a dream come true. Being your own boss and running a business with a proven concept and brand is the perfect scenario for budding franchisees. But, what about the franchise costs and fees? How much does it really cost to set up your franchise business? According to the British Franchise Association, the average cost of setting up a franchise is £42,200. This figure can vary hugely depending on the type of franchise bought, but its generally accepted that the most profitable franchise opportunity requires substantial investment.

So, lets look at the typical costs associated with most franchises in more detail.

The franchise fee

The initial franchise fee is the upfront fee you make when buy the franchise. Youre effectively paying to be given the right to use the brand name within a certain territory and to be trained and provided with advice. The franchise fee can vary between £500 and £300,000 depending on the franchise brand. As a rule, the initial fee is between five and ten per cent of the total investment, but can be as much as 40 or 50 per cent.

There should be no real correlation between the amount of the initial franchise fee and the success of the franchise. The franchisor shouldnt be setting out to make a profit from the initial fee, but from the ongoing fees. This is a fundamental part of the franchise business model. This way the franchisor has the incentive to help you build your business Simply put, for the franchisor to succeed, you most first succeed.

Set up costs

As a franchisee, youre responsible for getting your business ready to trade. This could include refurbishment and branding of premises, or the hire or purchase of vehicles or tools. These will be performed to the franchisors specifications, but the cost will fall to you. And the cost can differ hugely from one business to another. Obviously, a business that you can run from home, for example, will cost less to set up than one that needs premises, particularly in the high street.

On-going fees

The on-going 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. For the franchisor, the more successful your franchise, the more money theyll make. Equally, as a franchisee, the more money youre making the franchisor, the more support theyre likely to provide.

And the level of support and advice that the franchisor gives you is crucial to the success of the business. For this reason, dont be fooled by a low service fee. This can sometimes indicate the quantity and quality of support youll receive from the franchisor. Make sure youre happy with how much interest in promotion and improvement of the business format your franchisor will take in your business before fees are agreed.

Advertising fees

 

This fee covers the cost of marketing and promotional activity for the whole franchise. Money is paid by each franchisee into a pot which is then used to fund promotion of the brand, which youll ultimately benefit from. As with other on-going costs, advertising and marketing fees are usually calculated as a fixed percentage of the sales achieved by franchisees. This percentage can vary from 1 per cent up to 5 per cent of gross sales.

If youre the only franchisee then you may be asked to pay for a certain amount of local marketing per month. Whilst youll pay for the activity, your franchisor will advise you on the best method of marketing for your business.

Other costs to be mindful of

As with any business, there are a number of additional costs that should be taken into account when considering franchising. Whether you decide to renew your contract or resell the franchise, there will be fees to pay. Both of which should be stated in the original franchise agreement.

Its also highly recommended that you seek professional guidance from a specialist franchise solicitor who is affiliated with the British Franchise Association before and during the franchising process. This will obviously involve payment, but the services that they provide will offer you support and advice. And for true peace of mind, youll need to ensure that appropriate insurance is purchased. The type of insurance needed, and the level required, should also be documented in the franchise agreement.

Franchise opportunity costs

All the above franchise costs and fees vary depending on the type and size of the opportunity. Startups recently compared 4 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 £11,000 to taking over an existing McDonalds restaurant costing up to £200,000. There really are franchises out there to suit all types of entrepreneurs and sizes of pockets.

Finally, the old saying you only get what you pay for is so very often true. If the franchise that youre buying in to has a highly-perceived reputation, the initial franchise fee will be greater. If youre just starting out and require a high-level of support from the franchisor, the on-going fees will be increased to reflect the extra efforts. For the business to be successful, its 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.

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