Be Prepared

Richard Holden, head of franchising for the Lloyds Banking Group, explores the real cost of investing in a franchise

There is no standardisation across the franchise media regarding advertised investment levels, which can be confusing for any prospective franchisee. You need to know the likely total investment costs, including all equipment and working capital needed, so ask the franchisor for a full breakdown.

It’s important you fully research the likely costs before making any commitment to invest. Your business plan and financial forecasting should reflect the sales and operating costs you are likely to see, based upon the trading performance of existing franchisees in similar territories and your own local market research.

Vary

Costs for setting up a franchise opportunity can vary widely based upon the type of franchise you’re interested in. You will need to consider the following when researching the true costs of investing in your chosen franchise:

• Initial franchise package fee.
• Premises costs.
• Refurbishment costs.
• Fixtures and fittings.
• Signage.
• Opening stock.
• Equipment.
• Licences (software).
• Telecommunications (landline, mobile phone, broadband, etc).
• Tools.
• Vehicle costs (consider leasing as an alternative to purchasing the vehicle outright).
• Vehicle livery and fit-out costs.
• Marketing (including launch programme, PR, social media and networking).
• Stationery.
• Professional fees (solicitor, accountant, architect and surveyor).
• Memberships (trade associations, chamber of commerce, consumer groups, etc).
• Insurances.
• Staffing costs.
• Consumables.
• Ongoing management services fees.
• Ongoing national and local marketing and advertising costs.
• Working capital.

For established franchise brands, banks that specialise in franchising will consider lending up to 70 per cent of the total start-up costs, including working capital. For newer, less established ones, the available finance from a lender may be lower. The term of the lending will be linked to the franchise licence, so if the initial licence term is five years, the maximum term for a bank loan will not exceed five years.

Essential

Once you’ve established the overall level of investment required, you can start preparing your business plan. The business plan is an essential document to obtain finance from a bank, but also it should be used as a working document to identify development areas, as well as business opportunities.

Additionally, you will need to produce detailed cash flow and profit and loss forecasts for at least the first three years of trading.

A good understanding of all aspects of the business, including the financials, is necessary to be able to present your case to a lender. A bank manager will ask challenging questions and expect you to be able to answer them confidently, so be prepared.