What are the costs of setting up a franchise?
Start up costs, equipment, stock. How does it all add up?
Costs vary according to the type of franchise, what equipment and premises you need. At the lower end of the scale you can get mobile vehicle repair franchises for under £10,000.
However, with many mobile franchises you have to provide your own vehicle. This will cost extra – though often franchisors have leasing deals which can help.
At the other end of the scale you can pay hundreds of thousands for a high street catering franchise like a big-name burger outlet or pizza parlour – much of the cost is dependent upon the cost of premises.
Here again some franchisors help you find and lease premises, which can be hard to do on your own if your business has no history.
The startup costs of a franchise commonly fall into three categories:
The franchise fee, which is a joining fee you pay when you sign the contract. It buys the right to use the company’s name and system.
To start up you also have to pay legal fees, accountants fees, for checking the franchisors’ figures for your growth potential, etc, the cost of any stock, equipment and vehicles, fitting-out costs for shops or workshops and the cost of any bank borrowings you need to start the business.
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You will also need working capital – many franchisors specify how much.
Then you also pay a monthly or weekly royalty to the franchisor, usually based on your turnover, not profits. You may also pay an advertising levy if the franchisor handles advertising for you or admin fees if they handle bookkeeping, accounting or stock control.
Finally, you also pay a fee to renew your contract when your initial franchise period runs out. This is usually calculated on a percentage of your gross profit for the preceding year.
As you will probably be doing pretty well after, say, five years, it can be considerably higher than the franchise fee you paid to join. This is why you need to check this before signing the initial contract.
There are a few franchises where the fees are structured in a different way: you pay a small sum to join and a flat fee every week or month for ongoing services.
The franchise fee buys the right to use the company’s name and system.