Prospective franchisees must look beyond the initial investment level to discover the true cost of buying a franchise
Without standardisation in the way franchise brands market their opportunities, it’s often difficult for a potential franchisee to clearly understand the true cost of buying a franchise.
There is a need to delve deeper to fully understand the total investment and what you’re actually getting for your money.
Ideally, any investor would like to understand an accurate cost to them before pressing ahead with their research. That way they can simply eliminate opportunities that will be out of their price range. But in reality it’s not that simple.
There are a number of brands that are totally transparent and will disclose in detail the overall costs of investment. However, there are plenty that will make the complete capital outlay less obvious from the beginning.
This can draw the investor into investing considerable time researching the opportunity and wrongly feeling obligated to proceed when the true costs become apparent. So how can you rely on what you are being told at first glance?
If you’re being told the franchise licence fee or franchise package cost, this is unlikely to cover the entire amount you’ll need to make the investment. Often, the real budget could be tens of thousands of pounds more than the advertised figure.
Don’t be frightened to ask for a full cost breakdown before you’ve committed too much time and effort researching an opportunity. You may need to add in expenditure for the purchase or lease of premises, as well as store design fees, renovation, fixtures, fittings and professional and legal fees.
Even if you’re setting up from home, there may be additional expenditure required for equipment, mobile communications, broadband, furniture, stationery, storage and insurance that could run into thousands of pounds more than you initially budgeted.
If you’re considering a van-based franchise, there will be the cost of the vehicle to factor in, which would require a deposit to be paid up front, even if it was leased. Additional expenditure for a van may include racking, livery and equipment, which may not always be included in the package fee quoted in the brand’s marketing literature. You may be required to pay for annual memberships of trade associations, software licences and even the cost of a launch campaign.
This step is often overlooked, but it’s worthwhile speaking to as many existing franchisees as possible in the brand you are researching.
You can ask them about their own experiences of setting up their business and whether they encountered any unexpected or hidden costs. The franchisor may wish to manage this process, but you should be free to speak with as many franchisees as you wish to make an informed decision.
If a business runs out of money, it won’t survive. Therefore, having sufficient working capital is essential. This figure is often overlooked in the initial advertised set up expenditure. It’s difficult to put an accurate figure on the working capital requirement, as each franchisee will have their own individual drawing requirements from their business.
Some owners may not need to take personal drawings from their business from day one, as they may have an alternative revenue stream or their partner may have sufficient income to cover all household and personal expenditure, while others will need to take a salary from the business from the outset before the business makes any profit.
Two franchisees buying into the same brand with similar locations may have considerably different investment levels due to their individual business specifications and working capital needs. The number of local competitors, demographics, brand awareness, operational efficiencies and rate of growth will also impact the amount of working capital required.
For well established and proven franchise brands, banks that understand the franchise market will consider funding up to 70 per cent of the total investment cost, including any working capital. For opportunities that are new to the market or less tried and tested, the level of funding available may well be lower, subject to status.
Your business plan and financial projections will need to detail as accurately as possible the set up and ongoing business costs. It’s prudent to ensure you have a contingency reserve of funds to fall back on just in case the business requires any unplanned expenditure or takes longer to get off the ground than originally anticipated.
Your initial approach to a bank should always be through its specialist franchising team. They will ensure you receive the professional support and guidance you need, which may not be guaranteed should you make a direct approach to a local bank manager. The Lloyds Banking Group franchise unit can offer invaluable insight into the brand you are looking to invest in, so it’s worthwhile picking up the phone to them in the early stages of your research.
The majority of franchise brands are ethical and transparent in their efforts to recruit new franchisees. However, any buyer should be aware that they need to thoroughly research the opportunity and exactly what they get for their investment, as well as the overall cost, to ensure there are no unexpected expenses that could trip them up before they get started.
Some of the potential costs to consider when investing in a franchise:
Richard Holden is head of franchising at Lloyds Banking Group
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