Discover the true cost of buying a franchise

It’s not just about the initial investment. There are other elements to take into account to ensure you start life as a franchisee on a sound financial footing

Buying into a franchise could be the best thing you’ve ever done in your working life.

You’ll be the owner and boss of your own business and instead of working hard for somebody else, you’ll be able to earn an income and build the value of your business that one day you’ll be able to sell, hopefully for a decent amount of money.

Statistics show that franchising is a much safer way to start a business. Largely, this is because you’ll have purchased a business format that has been proven as successful, safe and profitable.

You’ll normally have the benefit of a recognised brand, training and business and marketing systems to follow. So what - apart from a pandemic! - could go wrong? One thing for sure is not having enough money, or access to enough money, to negotiate the early part of your journey.

Delve deep

The cost of buying the franchise licence is nearly always apparent at the outset. The licence gives you the right to use the systems and brand name, etc for a defined amount of time - often five years.

But you have to delve much deeper to understand what else is included in the price you pay and what you’ll have to purchase separately in order to have everything you need.

These costs fall into two distinct timeframes: your start-up/pre-trading costs and your actual trading costs. Let’s deal first with the former.

Start-up/pretrading costs

There will be legal costs to pay, as you’ll need a solicitor who is experienced and qualified in franchising matters to help you.

Use them to explain to you what the various clauses mean in the franchise licence. You’ll also need them to help you if you’re entering into a lease over business premises. Budget for around £500-£750 (plus VAT) and possibly even twice this if there’s property involved.

You’ll need a professional business plan and a set of financial projections. Don’t scrimp on these, as they’re your road map and will help show you the true cost of running your business (more on this later). The budget on paying a business consultant or accountant in the region of £1,000 (plus VAT).

You’ll normally also need to set up a limited company and organise your bookkeeping, payroll and VAT systems.

If you don’t have hands-on experience in these areas, it’s much better to outsource these elements to ensure they’re accurately set up and run correctly.

Also, this gives you more time to concentrate on sales, marketing and getting customer service spot on, so you hit the ground running and make a splash in your marketplace.

Budget around £400-£500 (plus VAT), which should include some training on the things you’ll have to do each month and each quarter.

Your franchisor will undoubtedly give you a list and explanation of the physical things you’ll need to buy in order to set up your new business, but it’s not a bad idea to talk to some existing franchisees to get their view on costs, sourcing and what else they needed that might not have been on the original list.

Trading costs

Now let’s move on to the second phase: once you start trading.

Most businesses will make a loss in the first six months or so of trading - some for a longer period. While this is not always the case, it’s fairly commonplace.

This can be for a number of reasons, including the time it takes for your business to become known and in some cases trusted, compared to the competition. It may take you time to become proficient at providing the service, reducing waste, hitting your margins or becoming a good salesperson.

So sales may be lower initially than your break-even point.

Unfortunately, whatever you earn each month, your fixed overheads, such as rent, wages, insurance and utilities, will still need to be paid. As a result, you’ll need some of your own money - called working capital - to cover these costs until the business becomes profitable and self-sustaining.

Also, some businesses will need to pay their employees first and give, say, a month’s credit to their customers. A good example of this would be a commercial cleaning franchise.

Similarly, you may have to pay for stock before you receive the sale proceeds. Either way, this is another reason for sufficient working capital.

The only way to work out what level of working capital you’ll need is to use your business plan - in particular, the cash flow part.

Speaking to other franchisees and your franchisor about this important part of the process will help, but whichever way you look at it this is often a large hidden cost that isn’t always identified correctly at the outset.

What else do we need to factor in to understand the true cost of buying a franchise? Don’t forget there will be a royalty - or management service fee - to pay to your franchisor. This is normally somewhere between 5-10 per cent of sales.

There is also sometimes something like a one per cent national marketing fee to pay on top of this, which is used by the franchisor to advertise the brand.

I would also recommend having a safety net/contingency equivalent of at least one month’s overheads, as so many things outside of your control can hit you when you’re least expecting it.

And finally, money aside, another true cost is the cost of your time. There is, of course, a trade-off.

Running your own business does mean you can time swap, which will enable you to go and see your children on sports day and take a bit of time off for important things whenever you need to. But generally, running your own franchise business means working on it, or in it, 24/7.

The rewards, though, can be huge. We sell on existing businesses to new owners often for hundreds of thousands of pounds, which makes the hard work and investment very worthwhile for the original owners.

So good luck to you on your business journey, but make sure you do your homework first.

6. COSTS TO CONSIDER ON TOP OF THE INITIAL INVESTMENT

1. Legal.
2. Business consultant/ accountant.
3. Working capital.
4. Ongoing fees to the franchisor.
5. Contingency fund.
6. Your time.

The author

Chris Roberts is chairman of the Chantry Group.