Total Franchise Investment: What Is It?

10/02/2018 16:00 | Financing your franchise

Franchise total investment

The cost of a franchise is going to be one of the key factors in your decision-making process. Don’t be fooled, though – low investment franchises may exist, but they’re few and far between. The average initial investment you’ll need to take on a franchise will depend entirely on the brand profile of the franchisor (the higher the profile, the higher the franchise fee), and a whole host of other factors. We’re potentially talking about thousands of pounds here, not hundreds.

How much of your own money has to go into the investment?

To buy into a franchise will take a considerable initial investment. Don’t panic, though – you won’t have to find all of it on your own.There are financial institutions that specialise in arranging loans at a reasonable interest rate for franchisees. As a rule, you’ll need to find up to 30% of the initial franchise fee yourself, and bear in mind that loans usually only last for as long as your franchise licence (around five years on average). So not only will you need to be able to cover ongoing franchise expenses, but you’ll also need to make enough profit to pay back both the loan and any accrued interest over the five years, too.

What not to do…

Don’t max out your credit cards or take out expensive loans to pay for a franchise, or borrow excessively from friends and relatives to get your foot on the franchise ladder. There are low investment franchises out there, so it pays to look for lesser-known brands where the initial investment fees are a little more manageable.

Talk to your franchisor

If there’s one person who is going to know the exact cost of a franchise, it’s the franchisor. They’ve been through the start-up procedure with other franchisees before, so they’ll have a far more accurate overview of the costs, from the price of a licence right down to average annual advertising expenditure. The best way to really get an understanding of the total franchise investment is to talk to the franchisor and ask for a cost breakdown.

Check out online

The British Franchise Association has more information on costing and franchise fees, as well as helpful advice on affordable franchises to own.

Talk to other franchise owners

If you can, try and get some advice from those who’ve had first-hand experience of starting up a franchise. A good place to find like-minded people is at FSB business breakfasts and conferences. By doing your homework first, you can get a realistic understanding of exactly how much money you’ll need to start and run your own franchise.

Talk to a solicitor or financial advisor

Taking on such a commitment is a big step, so don’t do it without getting as much information as you can before you make your decision.Talking to a legal or financial advisor who can help you look at your current financial position, your legal obligations, and your projected income can all help you make the right decision.

Let’s now look at a breakdown of the cost of a franchise, from initial franchise fees to VAT.

The franchise fee

This is the amount (set by the franchisor) that you’ll have to pay up front when you sign a franchise agreement. It’s usually non-refundable, and will depend on the nature of the franchise, the brand’s popularity, and other factors such as location, how much support the franchisor will provide, and your own initial capital input. A low investment franchise will have a much lower franchise fee than one for a popular and high-profile brand. This fee gives you the right to use the franchisor’s name, branding, business concept and identity, as well as determining how much input from the franchisor you’ll receive. It may also include:

  • Site selection and help in setting up the business (including warehousing, logistics and delivery vehicles)
  • Marketing and promotions – these may need to be tailored to your particular franchise, but should follow a brand-focused format
  • Initial training and tutorials
  • Initial support and help in opening the business
  • Transplantable corporate business models, and instruction on how to implement them
  • Help with staff training and recruitment

Working capital

It’s no good spending all your money on your franchise fee – even a low investment franchise needs working capital to keep it going. Depending on the type of franchise you’re taking on, you may need just a couple of month’s capital to cover expenses, or up to a year’s funds in reserve. Expect to blast through that financial float quite quickly initially, before you start to see any returns.

Other expenses

‘From-home’ opportunities are often the more affordable type of franchise business. You’ve already got your premises sorted out (usually the biggest expense after the cost of the franchise fee), but what about storage facilities, equipment, and even home insurance that’ll cover your business operations? The cost of a franchise can soon spiral upwards.

If you need to move into premises then the costs will increase dramatically. Everything from deposits and monthly rent payments to liability insurance, signage, grand openings, utilities, décor and fixtures and, of course, staff wages, are all going to eat into your working capital. Don’t forget that you’re going to have to pay yourself, too.

Inventory – everything, including the kitchen sink

Affordable franchises to own include those where the capital investment in inventory is minimal. These, however, are rare, so you will need to factor in a sizeable chunk of your capital to pay for inventory. Be very careful to check your agreement with your franchisor too, as there may be a clause in it that restricts where you can buy supplies and inventory from, even if there are cheaper alternatives on the open market.

Don’t forget official payments

It can be all too easy to forget factoring in stationery, postal charges or even your phone bill. However, one area you cannot forget about is official charges. Are you VAT-registered? Do you employ staff and have National Insurance and pension contributions to cover? Do you have the right insurance for your delivery vehicles, public liability cover, and employer’s liability insurance? How about your accountant’s fees?

These will take a toll on your finances, and ‘letting them slide’ for a month or two is not an option. Fines for not paying your VAT can cripple a fledgling business.

In conclusion…

These costs go to make your total franchise investment, and they can quickly mount up. If your working capital is limited and you’re finding that getting a loan is trickier than you thought, look for a low investment franchise to start with – one that won’t put too much of a financial strain on you. If that’s a success then you can always re-invest your capital into a more high-profile franchise later down the line.

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