Do I need to be rich to open a franchise?

Many people think buying a franchise is only for the wealthy, but that’s not the case. Alan Wilkinson, head of franchise development at The Franchising Centre, explains: “The short answer is no, you do not have to be rich to open a franchise. There are franchise opportunities available at all levels, from a few thousand pounds up to multi-million pound investments.”

Franchises generally fall into three categories, each with different levels of involvement and investment.

Owner-operator franchises are for those who work in the business themselves. These often require a lower upfront investment and can provide an income sufficient to sustain a lifestyle.

“These opportunities may be part-time, and generate a few thousand pounds per year of profits, or full-time and could earn the franchisee tens of thousands of pounds per year,” Wilkinson says.

Management franchises involve a larger initial investment. The franchisee oversees a team of employees and may need to invest in vehicles, premises or other infrastructure. While the investment is higher, the potential operating profit can also be significant.

Investment franchises are typically the most capital-intensive. The franchisee invests in a brand and hires a manager or team to run the business. This model is common in food and beverage chains, where franchisees may operate multiple units or even multiple brands. “The investment can be high, but then the rewards can also be high,” Wilkinson notes.

Funding for these opportunities can come from banks’ franchise departments or government-backed schemes to cover both set-up costs and initial working capital.

Wilkinson adds, “With good due diligence and research, a prospective franchisee can usually find the right franchise opportunity at the right investment level for them.”

How important is working capital in the early stages?

Brian Duckett, former chairman of The Franchising Centre, stresses that having sufficient working capital is “essential to running any business, particularly in the early stages when things rarely go as planned and all those cost items you overlooked suddenly jump out and bite you.”

Cash flow is often the biggest challenge. Sales may grow more slowly than expected, or customers may take longer to pay.

Duckett advises prospective franchisees to prepare their own business plan, not just rely on one provided by the franchisor. “Cash, or working capital, is the lifeblood of any business. If the blood stops flowing the body dies,” he says.

He also highlights that personal circumstances affect the amount of working capital needed. “If you live in a big house with a big mortgage and you have three teenagers at private school, you are likely to need more working capital than a single person living in a rented flat.”

What is the minimum personal investment required?

When it comes to putting your own money into a franchise, Duckett explains: “You would be looking at 30 per cent of the total set-up costs.”

It’s important to understand the difference between the franchise fee and total set-up costs. The franchise fee covers the rights to use the brand, trademark, system, software, initial training and often some equipment. It also helps cover the franchisor’s costs in recruiting you.

However, total set-up costs can be much higher, especially if premises need renovating, vehicles require fitting out or staff need recruiting and training before the business opens.

A good franchisor will provide clear figures. Duckett adds, “A good business plan will both tell you how much you need to borrow and make it easier for you to borrow it.”

Conclusion

Opening a franchise doesn’t require a fortune, but it does require careful planning, realistic budgeting and sufficient working capital to navigate the early months.

With the right franchise, preparation and support, opportunities exist at nearly every investment level, making franchising an option for many aspiring business owners.