Having a firm grip on the figures is crucial to a franchisee’s success, Cathryn Hayes, head of business support at the british franchise association, says
As future independent business owners, it’s imperative that prospective franchisees fully understand the financial side of their potential new venture - both from a funding and business planning perspective.
You will need to have some capital available to buy your chosen franchise, but you may not need to find the whole amount needed up front. Banks may lend up to 70 per cent of the start-up costs for an established franchise, while for newer franchises the figure will probably be around 50 per cent.
When you start your franchise, you will need to pay for various items, depending on what type of business you are going into. Premises can be one of the most expensive, especially if you need a location with good footfall, as rent and rates can be costly. However, if your franchise can be based from your home, you will not have to cover those costs. Other possible costs could include initial stock, stationery, computer equipment, software and vehicle costs.
Some franchisors will include the initial training and marketing launch costs within the franchise fee - others will charge a separate fee for those services.
It is essential you understand what the upfront and ongoing costs will be, how long it will take for your business to reach break even and what living costs you will need until the business can support you. The other important area for you to establish is how long it should/could take to recover your initial investment.
You could be asked to pay a deposit to show you are serious about buying your franchise. This is fairly standard procedure, but you should take great care to ensure you are fully aware of the conditions for a refund and what costs might be deducted.
British Franchise Association rules state that member franchisors must return any deposit taken if the prospective franchisee does not go ahead. However, some expenses incurred can be deducted. Any deductions must be fully detailed and should not include indirect or ‘lost opportunity’ costs. Non-bfa members may have other conditions, so be clear about what you’re agreeing to.
You need to do your research to ensure you know what you are buying into and what financial returns are achievable. One of the best ways to find out the facts is to speak to existing franchisees and ask them whether the initial projections provided were realistic and how their business is currently doing against budgets.
Focus on the figures, so you understand how your business will work. If you are projecting turnover of, say, £100,000 in year one, how many customers will you need every week to achieve this? Could there be a few months of low income as you build the business up? How will you fund your living expenses until the franchise is successful enough to allow you to pay yourself a wage?
What if your franchise is slow to build? Do you have a contingency plan? What happens if sales come in much faster than anticipated? This is a great problem to have, but could cause cash flow problems and put strain on the business.
A good franchisor will help you through many of these issues, but as a franchisee and business owner, you need to fully understand the cash flow of the business. Once you have a good idea of the costs involved, you will be in a better position to research and compare your options and should be able to start putting your business plan together.