Why it’s crucial to know the true cost of buying a franchise

Posted: 23 Aug 2019
Estimated Read Time: in about 11 minutes

Here’s what to look out for before you sign on the dotted line

Why it’s crucial to know the true cost of buying a franchise

More and more people are looking at investing in a franchise as a potential route into business. Investment in a tried and tested business model with the training and ongoing support from the franchisor are all compelling reasons to choose a franchise rather than starting your own business independently.

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When you also take into account that an established brand name will attract customers from day one and the franchisee network will provide the opportunity to pick up national account work and negotiate better terms with suppliers, then franchising becomes an even more attractive prospect. Add to all that, the fact that the failure rate for franchisees is considerably lower, at fewer than 2 per cent and it becomes a compelling argument.

However, franchising is not a get-rich-quick scheme and thorough research is necessary before making any commitment to invest. Running any business, even with the backing of a franchise, will take a lot of energy, commitment and hard work in order to succeed. Research is the key to finding the right franchise opportunity to suit you. With so many brands out there, each will be looking for different key skills and will offer different levels of investment.

Do your research

There are many places to research franchise opportunities, however, it is not always clear what the true investment costs are, as there is no standardisation across the franchise media, which can be confusing. You need to know the likely total investment costs including all tools, equipment and working capital needed. Ask the franchisor for a full breakdown of the investment plus the ongoing costs. As an investor, you should also consider how much personal income you will need to draw from the business to maintain household costs, which should also be factored in.

Check the small print

When you’ve selected your chosen franchise you will be asked to sign a franchise legal agreement. These contracts are lengthy and are rarely written in plain English, so it is essential that you get the agreement checked and explained to you by an experienced and reputable franchise solicitor, preferably affiliated with the British Franchise Association.

The legal agreement will set out all the ongoing costs, however, some of these are not always entirely transparent. It is right that the franchisee should be paying for the support and guidance they benefit from, but be aware of all of the upfront and ongoing costs before you make a commitment to invest. Most franchisors do provide transparency once they know a potential investor is genuinely interested in buying into the franchise; however, make sure you fully understand the commitment you are entering into.

Franchising remains a less risky route into self-employment and it is likely that there is a perfect fit for you out there, but there is no substitute for methodical research and understanding the true costs before you commit to your chosen franchise brand. Covering the cost can be done by either using your own savings or with the help of bank funding, so speak to your bank to see how they can help support your business ambitions. Lenders with a specialised franchise department, such as Lloyds Bank, have a team of trained managers who understand franchising and are likely to have a track record of funding existing franchisees in the brand you are looking to invest in.

THE HIDDEN COSTS

+ A mark-up on any goods or services that are provided by the franchisor
+ A commitment to spend a minimum amount on local marketing
+ A commitment to purchase a minimum amount of product from suppliers
+ Software licence fees
+ Vehicle leases
+ Additional training fees
+ Charges for new business leads
+ Bookkeeping services, central invoicing and payment collection
+ Licence renewal fees
+ Be aware of fixed management service fees or where there is a minimum amount payable, to ensure that these are set at reasonable levels

The author

Suki Dehal is the franchise development manager at Lloyds Bank.

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