Counting the costs

Buying a franchise involves making an investment that covers many different areas. Novuna Business Finance breaks down the fees and what they mean

The cost of investing in a franchise is dependent on several factors, such as the nature and size of the business, as well as the territory you’ll be operating in.

An initial outlay may be as high as £500,000 or as low as £5,000 and will, in most cases, include the following costs:

1. Initial franchise fee

This is the basic one-time fee to ‘buy in’ to the franchise and usually accounts for five to 10 per cent of the total investment required. For franchisors, this is rarely a source of profit and will simply help to reimburse them for the time and cost spent developing the franchise, recruiting, and helping the franchisee find a suitable location in which to operate.

2. Training fees

Although typically included in the initial franchise fee, training fees can sometimes be levied as a separate cost.

3. Premises

In some instances, the franchisor may sublet the premises to you and there may be advance rent or premiums which need to be paid.

4. SHopfitting

There may be additional fees if the franchisor has contracted a third party to undertake the shop fitting.

5. Vehicles and equipment

If vehicles and equipment are essential to the running of your business, there are likely to be additional costs to factor in.

This could include outright purchases or an asset finance deal where an initial outlay is required followed by monthly payments.

6. Initial stock

Initial stock may need to be bought directly from the franchisor or an approved third party. In either case, you should receive guidance from your franchisor on exactly how much stock is required to hit the ground running.

7. Working capital

Setting aside working capital will be necessary to ensure basic costs can be paid (salaries, energy bills, taxes, or rent) while income is being generated.

8. Marketing

Initial and ongoing promotional costs – such as advertising online, in print or on the radio – may be factored into the initial fee or itemised separately, depending on your franchise agreement.

The majority of franchisees will need to obtain financial assistance for the initial investment. Work out how much you need to borrow and what financial services will best assist you (for example, a small business loan, credit card or invoice finance solution might all be worth looking into). Also, it may be sensible to take out an overdraft to ensure you have enough working capital during your initial trading period. Some financial questions to consider are:

• How much can you personally invest?

• What proportion of your personal resources can you put towards the total franchise cost? Ensure you carefully crunch the numbers and ascertain exactly how much you can afford to invest and how much you need to reserve for living costs on a month-to-month basis.

• How much will you need to borrow?

What security can you offer on any loan?

Ask yourself how long you will need to pay back the loan and consider that any outstanding debt will need to be settled by the end of the franchise term.