The real cost of franchising

OK, so you’ve taken into account your preferences, skills and ambitions. You’ve figured out which industry you wish to operate within. You probably have even made the decision on the type of franchise business you want? All that’s left is hard work and paper work – but how prepared are you really?

To avoid getting caught out financially – even before you open the business doors - it’s vital to calculate all of your total upfront and running costs!

Don’t just take someone else’s word

During the franchise acquirement, the franchisor will present to you a detailed business plan covering all the elements of the investment and running costs.  UK franchising specialist, Jensine Hough, says franchisors are often characterised by, "Making wildly optimistic theories about the cost of starting a franchise." 

Before you sign a franchise agreement, it’s actually on you to make sure that the licensor didn’t overlook any initial calculations items payable by you - including:

• Renovation of premises
• Purchase of equipment
• Payment of any necessary opinions
• Permits
• Concessions
• Stock

Remember, during any franchise site renovation you’re unlikely to earn and are most likely already paying for things such as rent and utilities.

We recommend writing a ledger with all the costs you think will be associated with the fixed costs of running the business – these may include:

• Rent and utilities
• Employees
• Purchase of goods
• Promotions and marketing

Let’s talk investment costs

When starting a business, there will inevitably be some level of investment costs. In franchising this usually means a once-off payment called an initial franchise fee. In return you get the keys to the kingdom, otherwise known as a franchise package. Costs can vary dramatically, so make sure you pick the right one for you.

Secondly, find out what’s covered by the franchise package, and what you need to take care of yourself. The basic elements of the franchise package are the trademark and developed know-how. Most franchisors will add a premises design to fit in with their company theme. For example, the exact placement of the furniture and the colour of the walls (think McDonald’s). It’s worth double checking who will cover the costs of any such room design. In addition, the franchise package will usually include tangible items such as workwear and marketing materials. For example, the franchisee usually receives ready-made leaflets, signs or posters from the head franchisee ahead of the new franchise launch.

In most cases the initial franchise fee also covers the cost of training. Before signing a franchise agreement, find out exactly what the training covers. In gastronomy, for example, the franchisor should teach and set their standards of customer service and menu food preparation. The location of the training is also important. If the training is at a faraway location, again, double check who covers the cost of accommodation, meals, and transport. In order to open a new franchise with a bang, some owners will provide an initial marketing campaign. This might include refreshments, samples or discounts for first customers. Find out who dons these costs and keep note.

As a licensee you will have to equip, maintain and even renovate your business over time. If you open a hairdressing salon, for example, you need to have hair dryers, accessories and even nice armchairs. For a gastronomic establishment you have to take into account out of the regular box expenses such as ventilation – which can be costly. You will also have to maintain and meet numerous occupational health and safety regulations. Another example, if you run a food truck, you have to think about costs of petrol, registration and the upkeep of the vehicle.  

Another thing worth noting is that some franchisors offer equipment leasing, which can help lower the initial investment.

Calculating the running costs

Now you know how much you need to invest into the company. Time to think about your daily expenses. Franchisors don’t usually provide precise calculations regarding the working capital needed to run a business. This information helps to predict and control future costs. Sometimes licensors are over optimistic about the franchisees’ potential income. It’s not out of bad intentions, but more of an encouragement marker. UK franchising expert, Jensine Hough, says don’t forget to add the day-to-day operation costs of the business to the price of the license when calculating the full amount of their investment, as this may force people into their reserve funds early.

Now, let’s take a look at your current expenses. Firstly, find out what conditions the franchisor is presenting. Most franchisors charge a monthly franchise fee; either a fixed amount or a commission based on your profits. 

Secondly, estimate the amount of rent for the premises. Add your predicted water and electricity charges, leasing instalments, advertising materials, office accessories, as well as your goods and service charges. Check whether the franchisor recommends its own product suppliers or if you have to source them yourself. 

Calculate how many customers you need in order to earn, by looking at the predicted sales results. This way you can accurately predict how much money you need to start the business and how quickly you will reach the break-even point. For the first few months of operations, it’s worth ensuring you have a financial cushion (reserve funds) - because profitability doesn’t always happen overnight.

What if your savings fall short?

After calculating all the initial costs, you may find your savings fall short. Check in advance to see whether the franchisor will agree to a bank loan investment. Some franchisors don’t allow loans at all. Others may allow a certain percentage of borrowed money to be put towards the franchise investment.

Banks in Europe approach franchise companies roughly in the same way as any other economic entity - so look for a loan with the best rates. Don't be afraid to negotiate. If possible, try to involve the donor in negotiations with the bank. 

Because at the end of the day, it’s your money and your business!