Past franchise finance questions
Question: Can I get rich with a franchise?
Answer:Franchises come in all shapes and sizes, with a wide range of both investment levels and returns.
Money is not always the only factor when choosing a franchise, quality of life and the satisfaction of being your own boss. However, if a business that generates high returns is what you are looking for then you need to ensure you purchase a franchise that will deliver this.
A franchisor should provide you with projections to aid you with your decision. There are plenty of examples of successful franchisees running million pound operations – in fact Domino’s quote that 1 in 3 of their franchisees are millionaires!
However, franchising is not a “get rich quick” option. You must be prepared to work hard and get your hands dirty – but for those who do, the rewards can be limitless!
Cathryn Hayes, HSBC
Question: How long before I start earning?
Answer: The answer to this question will depend on the franchise you are thinking about purchasing.
The franchisor should be able to provide you with projections at the outset to show when the business is likely to start generating a profit.
You should use these projections to produce a cashflow statement for the first couple of years to help you understand when payments will be made and monies received, so you can work out your capital working requirements – the money you will need to live on before you can begin to draw a salary from the business.
It is important to consider the financial implications carefully before buying a franchise. You are entering into a long term commitment and need to get the finance right at the outset.
Cathryn Hayes, HSBC
Question: What if my money is tied up in my house?
Answer: When looking for finance to purchase a franchise, the banks will also expect you to put in some of your personal funds. This is typically 50% of the total starting costs, including working capital but for a well established franchise with a good track record, this could reduce to 30%.
If all of your funds are tied up in your property then there it is worth considering if there are any other sources of funds – can your family help for example?
One option could be to remortgage your property if you have sufficient equity. Your mortgage provider will be able to discuss this with you; however it is not something you should consider without talking to your family first.
Another thing to bear in mind is that, depending on the amount of lending required, the bank will usually want some form of security from you. This is typically a charge over your property but if you have released all of the equity then you will need to think about if you have any other assets that could be used.
Where no security is available, we may consider finance under the Government’s Enterprise Finance Guarantee, if the business is eligible. This is a government backed scheme to guarantee 75% of borrowing where security is not available and where lack of security is the only bar to the bank lending money. However, this is a more expensive option as you will pay a premium to the government in addition to the interest rate margin.
Cathryn Hayes, HSBC
Question: My husband is looking into a franchise to deliver food in a specific territory. The contract indicates that after 5 years there will be another fee. But we are paying now a fee to get the territory. Is it normal that the franchisor is asking for more after a set amount of time?
Answer: Yes, this is common place. The initial Franchise fee is a one off payment to buy into the business and reimburse the Franchisors costs and a typical franchise agreement usually lasts for a minimum of 5 years then if you decide to renew after the end of this period, a fee may be payable to reimburse the Franchisors legal costs. A monthly service fee is also normally charged as a fixed fee or a as a percentage of turnover.
Cathryn Hayes, HSBC
Question: I am looking at investing in a Pest Control Franchise. Could you tell if there is an industry 'average' of 'royalty fees' that are charges per month by Franchisors?
Answer: The range of monthly service fees varies widely between different types of businesses, depending on turnover, profitability and margins. The fee will also reflect the level and range of services provided by the franchisor.
You will need to speak to the Franchisor and existing franchisees to gain an understanding of what you will receive in return for this fee. There may also be an additional advertising / marketing fee. Again your research should determine if this is the case.
There is no industry average as such but whilst carrying out your research it may be useful to find out what other franchisors in your chosen sector are charging to enable you to make a comparison.
Cathryn Hayes, HSBC
