Adopting the franchise model can be a great way to expand into new territories. But before you jump straight in, first, you need to understand the cost of franchising your own business.
Deciding to franchise your business might just be one of the best decisions you ever make, but you must make sure it’s right for you. And part of this process is understanding the true cost of franchising. While this, of course, varies from business to business, the BFA suggests that it generally costs around £170,000 for a new franchisor to franchise their business. However, HSBC suggests that launching a franchise could cost around £50,000. The reality is it will depend on individual requirements; for more complex businesses, it’s likely that more professional advice will need to be outsourced, which increases the development costs.
The cost of franchising your own business
1. Brand protection costs
Trademark registration isn’t particularly costly and you can do it online. But it’s the foundation of your franchise programme, so you need to spend time getting it right.
2. Pilot operations
Another cost of franchising your own business is the development and testing of systems, and pilot operations. Before you start franchising your business, you need to create a robust model capable of providing a good return on investment for your future franchisees. You have to be able to prove your franchise will be viable and stand out from competition in the industry.
The best way to make sure you’re on to a winner is to trial the business model through a pilot scheme. During this initial phase, you’ll try out an easily replicable prototype franchise unit to see if it works well. Unfortunately, it’s difficult to put a price on the exact cost of launching a pilot operation, as it’ll depend on the type of business you’re running.
The pilot test also gives prospective franchisees the reassurance they need before they choose to invest in your business. They’ll be able to review financial figures from ‘actuals’, rather than estimates, which will make your franchise all the more attractive – as long as those financial figures are impressive!
If the pilot phase was successful and you know your business model is feasible, you should progress to the development phase. This is where you will create a franchise package to appeal to prospective franchisees.
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3. Developing the franchise package
The franchise package provides franchises with all the information they need to operate their own business successfully, including systems, procedures, training and support, operations manuals and sales literature.
The operations manual is a document that you provide to franchisees. It instructs and guides them on how to operate their new location of your franchise business. Lots of first-time franchisors with well-developed systems create their own operations manuals that they can add to and improve over time, while others choose to hire professionals who develop it for them. This will come at a cost, though. The price will vary depending on whether the professionals are just providing basic assistance, or are going out on-site visits and taking a larger role in the manual’s development and completion.
4. Assembling your franchise disclosure document (FDD) and franchise agreement
The franchise disclosure document (FDD) forms the legal basis of your new franchise system. It will include the franchise agreement and any other legal agreements between you and your franchisees. This is a very important document; therefore, it needs to be prepared by a franchise lawyer. They should advise you about the best development structures for your business goals; for instance, whether to sell individual unit franchise agreements or multi-unit development opportunites. If you’re new to the industry you might underestimate quite how much this can cost. But be aware that it is a significant expense of your new franchise programme.
5. Recruiting franchisees
Once you’ve got all your paperwork out of the way, you can start the next exciting stage: hiring the talented franchisees who will be the face of your brand! Recruitment costs can be split into the following sections:
- Producing a prospectus
- Holding franchise exhibitions
- The time you spend on the selection interviews
These costs will also depend on whether you plan to advertise your investment opportunity yourself or use an external franchisee recruitment service.
Establish and stick to your criteria for those whom you consider suited to operating your franchise - do not lower your standards even when recruiting the first few franchisees or when the growth in your network is not keeping pace with your expectations. If you do lower standards for sound commercial reasons, it is highly likely that these franchisees will become troublesome in the future. - The ‘Godfather’ of franchising, Manzoor Ishani
6. Hiring franchise talent
You might also want to keep some cash saved back for hiring a specialised team of employees with a wealth of franchise experience behind them. Your new franchise could be destined for great things at a much quicker rate if you hire qualified franchise professionals who can share their knowledge and experiences with you.
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7. Consultant, solicitor and accountant fees
Franchising your own business is a big task and you shouldn’t avoid seeking professional advice to keep costs low. Otherwise, you risk missing something important and having serious regrets further down the line. We’ve already mentioned when you should consult a lawyer in the earlier sections but remember that you can get professional advice at any point in your franchising journey. Don’t be afraid to ask for help.
The cost of franchising your business – the summary
In order for you new franchise venture to succeed, you need to take time carefully constructing your plan of action and have a realistic expectation of the costs involved. If you still have some doubts about whether this is the best business move for you, check out the pros and cons of franchising your business. You might also want to find out the top 5 things you should know before franchising your business.
Becky Martin, Point Franchise ©