When it comes to investing in a franchise, it can be tricky to judge just how much money you should invest. Many prospective franchisees have the option to borrow capital, but you don’t want to over-stretch and be sucked into an expensive and unrealistic repayment plan. Here’s how you can make sure you don’t go broke when you become a franchisee.
The costs involved in investing in a franchise
Before we get into our top financial tips for investing in a franchise, let’s go through the main costs and fees involved in setting up a franchise unit. You should be prepared to pay:
1. The franchise fee
Every franchise asks new investors to pay a set fee before they get up and running. This payment gives you the right to use the franchise’s name, branding, business concept and identity. It also covers:
- Initial training and business support
- Guidance with site selection and help setting up the business (including warehousing, logistics and delivery vehicles)
- Help with staff training and recruitment
- Marketing and promotions – these may be tailored to your franchise unit, but should follow an established format
The fee you pay will depend on a number of different factors, including:
- The type of franchise you join
- The brand’s popularity
- Your unit’s location
- How much support the franchisor will provide
- The general cost of the franchise opportunity (a low-investment franchise will have a much smaller franchise fee than a popular and high-profile brand would)
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2. Working capital
Once you’ve paid your franchise fee and set up your unit, you’ll need to cover ongoing costs. Very few franchises provide an immediate return on investment, so you must be able to cover initial outgoings with your own capital. Depending on the type of franchise you’re taking on, you may need just a couple of months’ capital saved up, or a year’s funds in reserve.
Your regular payments will probably include rent, utilities, tax and insurance, but every business comes with its own unique set of outgoings. You may need to pay:
- Employees’ salaries, national insurance and pension contributions
- Vehicle insurance
- Employer’s liability insurance
- Public liability insurance
- Equipment or vehicle maintenance costs
- Storage facility fees
- Accountants fees
- Postal charges
These are just a few of the costs you may encounter, so don’t forget to do your research and make sure you’ve factored all potential payments into your financial plan.
Note: You can save money by joining a home-based franchise. You’ll eliminate extra rental costs, as well as the many other fees associated with operating from a business premises. You’ll save on everything from deposits to liability insurance, as well as signage, internal fixtures and, of course, the grand opening.
The amount of money you put towards your inventory will depend on the franchise you join, but you’ll probably need to set aside a sizeable chunk of your capital. When it comes to buying stock, it’s worth double checking the franchise agreement before you invest in the business.
Some franchisors ask their franchisees to buy from specific suppliers – even if there are cheaper alternatives on the market. This usually helps to make sure the franchise offers a consistently high-quality product or service, but if you’re not happy with these terms, you should look for a different franchise.
4. Regular franchise payments
As a franchisee, you’ll have to pay royalties to your franchisor in exchange for using their brand. These payments are usually paid monthly as a percentage of your profit but can also be a set fee. You may also be asked to contribute to a marketing fund to help cover the costs of nationwide or worldwide advertising campaigns.
The golden rule for keeping your bank balance happy
It all comes down to avoiding investing more than you can afford
Many budding investors are excited by the prospect of borrowing large sums from lenders and putting their newfound cash into a profitable business model. This opportunity is certainly a blessing for the many would-be entrepreneurs who just don’t have the savings to launch their own business – but it’s important you don’t get carried away.
As a rule, franchisees can borrow up to 70 percent of the franchise costs, but most loans only last as long as your franchise licence – usually around five years. As a result, you’ll need to make sure you only borrow as much as you can afford to repay in that time. Remember, you’ll also need to cover ongoing business expenses and any interest the loan has accrued. So, it’s well worth going over your financial plan with a fine-tooth comb before you approach a lender.
Top tip: Don’t get wildly expensive loans, max out your credit cards or borrow excessively from friends and relatives to get your foot on the franchise ladder. There are many low-cost franchises offering a great return on investment, so it pays to look for lesser-known brands with more manageable initial fees (and loan repayments).
How to work out your budget
We recommend getting as much information about your franchise opportunity if you’re to build a great financial plan and avoid going broke. Here are some of the best ways to get informed:
- Talk to your franchisor – If there’s one person who is going to know how much you’ll need to invest in your franchise unit, it’s your franchisor. Unless you’re the first franchisee to sign up, they’ll have been through the start-up process before, and have a good idea of the costs involved. Read up on some of the most important questions you should ask your franchisor to make sure you ace your business plan.
- Check out the bfa’s website – The British Franchise Association has lots of information on franchise costs and fees, as well as the most affordable franchise investment opportunities.
- Talk to other franchisees – If you can, get advice from those who’ve already experienced everything you’re about to go through. If you don’t get the chance to attend a business event before you become a franchisee, make sure you get involved in ones in the wider franchise industry. There are plenty of reasons why you should attend a franchise expo, but mainly, they’re fantastic for gleaning valuable information from experienced and like-minded investors.
- Talk to a solicitor or financial advisor – Taking this step will give you the support you need as you review your current financial position, legal obligations and projected franchise income. Don’t underestimate the value of getting a second opinion from an experienced professional.
Write a financial plan
A key part of working out how much you can afford to borrow and invest is building a financial plan. Whether this outline forms part of your wider business plan or works as a standalone design, you need to dedicate a decent amount of time to researching for it. The decisions you make now are likely to affect your business growth and financial health for years to come, so you need to get this step right.
Remember, you need to be smart about how you save, invest and spend. Do your research to find out how much you should set aside for re-investing in the business, your own salary and additional costs like staff benefits. Don’t borrow as much as you possibly can; you may find your initial profits don’t cover your repayment obligations. By giving yourself a small safety margin, you protect yourself from extra financial debts.
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Investing in a franchise is a huge commitment, so it pays to do your research and make sure you’re fully clued up before you select and invest in a business. If you’re concerned you don’t have much cash to work with, find out how to start a new business on a shoe-string budget.
Alice Tuffery, Point Franchise ©