3 min read
There are plenty of reasons to consider franchising, particularly if you’re new to business ownership. You benefit from a proven business model, supported by a head office team. Franchising’s failure rates are also significantly lower than standalone businesses. On average less than 5% of franchise businesses fail, in comparison to 40% of independent start-ups. With that in mind, you might be wondering how much money it costs to get started? Here’s a rundown of the top franchise costs to consider.
How much money do you need to start a franchise?
You’ll need some money in the bank before you can open any new business. Franchise start-up costs will vary widely depending on the industry, size, and location of the new business. According to the British Franchise Association, the average cost of setting up a franchise is £42,200. This factors in all franchise fees, working capital, equipment, and inventory.
There are franchises to suit all budgets, however. Some basic concepts cost less than £10,000, while international brand-names can run over £5 million. This depends on brand recognition, retail premises, the number of staff required, and other factors.
Start-up franchise expenses
Before you open your doors, you’ll need to shell out a few basic start-up franchise costs:
1. Franchise fee
The new business owner must pay an upfront fee to the franchisor to get started. You’re essentially paying for the right to use the business concept and name. The fee also covers all customer support, including training, assistance with staff recruitment, site selection and development, and initial promotions. Franchise fees will cost between £5,000 and £300,000 or more depending on the type of business.
2. Set-up franchise costs
Although the franchise fee covers the cost of franchisor guidance when it comes to things like choosing a site for your new business, it won’t cover the physical premises. You’ll also need to budget for inventory, furniture, fixtures, and all equipment as part of your set-up costs.
3. Working capital
Franchisors put certain financial requirements in place before entering an agreement. This includes the need for working capital. In short, the franchisor wants to know that you have adequate funds to keep the franchise up and running until you start turning a profit. Working capital sees you through with the first few months – or years – of paying suppliers and employees.
Ongoing franchise expenses
Once your franchise business is up and running, you’ll then need to think about the usual costs of running a business. There are also a few franchise-specific costs.
4. Franchise royalty fees
You must pay royalty fees to the franchisor, sometimes called a management services fee. This might be charged either as a flat fee or percentage of sales. The royalty fee pays for ongoing support and the right to keep using the franchise name.
5. Insurance coverage
Don’t forget to leave room in the budget for insurance cover, the same as you would with any other type of business. Your franchise agreement will usually spell out what’s required.
Additional franchise expenses
Additional costs include the money spent to grow your franchise business over time.
6. Professional services
It doesn’t hurt to receive legal advice when you’re getting set up with any new business. You should also consider the cost of using an accountant to keep your books in good shape for accurate tax reporting. Architects and designers can help you launch your premises in line with franchisor requirements.
7. Advertising and promotions
You can’t bank on the brand name alone. Additional franchise costs include ongoing advertising and special promotions. Some franchise agreements do this on your behalf, but you’ll need to pay an advertising fee to cover national advert costs. Like other costs, these are often charged as a fixed percentage of sales.
Finally, there may be additional costs depending on what you do with your business in the future. Some franchise agreements charge a renewal fee to extend your contract. You might also need to pay a fee if you decide to sell your franchise, covering the costs of admin and training for the new business owners.
It costs money to make money, so how much money do you need to start a franchise? It depends on the type of business opportunity, but you should consider all the various franchise fees and other costs listed above. Be sure to do your research into potential return on investment to suit your financial goals.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.