Having covered franchise fundamentals (Part 1) and essential due diligence questions (Part 2), we now turn to the critical financial aspects of franchise ownership.
This third instalment in our 4-part series breaks down the various cost considerations, from initial investments to ongoing fees, and explores profit potential in franchising. Our franchise legal experts can provide detailed guidance on financial obligations and help you negotiate favourable terms in your franchise agreement.
Contents:
Why is understanding payment and costs vital for a franchise?
Franchising success requires a thorough understanding and management of costs. Not only does a successful franchise need robust financial planning, but also a clear understanding of the financial risks that could impact the business in the future.
Franchise ownership requires a range of costs from initial franchise fees to fees for training, and access to the franchisor's brand and resources. This is accompanied by ongoing fees such as royalties, marketing contributions, and potentially technology fees. As such, a cost analysis of a franchise project is essential from the outset, to plan and mitigate risk.
Unforeseen high franchise costs can quickly harm a franchise venture. If initial investment and ongoing expenses exceed revenue, then running a franchise could become a significant struggle. This financial commitment has the potential to commercially strain a franchise and limit its growth. As such, early cost awareness will enable you to identify risks and implement strategies to plan for solid financial management, ensuring the long-term sustainability of your franchise.
How much does buying a franchise cost?
There is no average cost of a franchise because it depends on the franchise and its reputation. A small franchise may require a minimum investment of £500, whereas a large reputable franchise like Clarks may cost £150,000. Make sure you do your homework by asking existing franchisees about their profits and costs, and consult your lawyer or accountant too, to make sure you are not overpaying.
How does a franchisee get paid?
You are not paid under a franchise agreement, rather you take a profit from the business of the franchise. So, if your franchise is making a loss, you will not get paid.
Given that you still need to pay royalty fees when making a loss, you should think carefully about what you would do in this situation, and indeed if buying a franchise is right for you.
How profitable is buying a franchise?
This will depend on your business management skills and the reputation of the franchise. A well-known brand will make things easier, but your abilities will also play a part.
What are the main things a franchisee will expect to pay for?
Potential fees that you may have to pay for are:
- A development fee, exclusivity fee, or initial franchise fee. These are upfront fees charged for giving you territorial exclusivity, or the right to operate the franchise.
- Store opening fee. This is an upfront fee payable on opening each franchised outlet.
- Service fee or royalty. This is usually a charge calculated as a percentage of your gross turnover, or a fixed amount.
- Marketing contribution. This fee is charged for the marketing campaigns the franchisor develops and runs on your behalf. This fee is usually a percentage of the gross turnover. However, the franchisor may also require you to commit to a minimum spend on your own local marketing campaigns.
- Training fees. This is a charge for the training you will get to operate the business. The franchisor may choose to arrange periodic training.
- Other fees. These fees could include lease rentals, software licences and support fees.
- Your business will likely incur various additional costs. For example, the costs of business insurance, professional fees, and general business expenses.
Key considerations before investing in a franchise
To complete your understanding of franchising, explore Part 4 of our series, which examines 'Different franchise models and structures'.
For comprehensive legal support with your franchise planning and agreement review, contact our franchise specialised legal experts who can help you navigate the complexities of franchise investment.
