The cost of buying a franchise

Article by David Williams Q.F.P.

The Royal Bank of Scotland

Figuring out how much a franchise will cost can seem like a daunting task.

For a start, there are several different types of cost to consider. Not all of them will apply to an individual franchise, while some will be higher or lower depending on the type of franchise you’re interested in.

However significant research, advice and information gathering will make matters simpler and it’s vital to take the time to do this rather than rushing head first into a franchise purchase.

The obvious place to start is by speaking with your franchisor to establish what costs you will have to pay. Increasingly, franchisors roll all of the start up costs together into a single package known as a turnkey solution. This provides clarity for the franchisee in terms of the total fees required and a degree of transparency.

A capital investment may also be payable and again can vary. Kitting out a restaurant could, for example, involve installing specialist kitchen equipment, furniture and relevant branding. Working as a franchisee from home will, on the other hand, mean a much smaller capital investment is required.

When looking to become a franchisee it is important to seek professional advice, including via a solicitor, who should be affiliated to the British Franchise Association. While this will incur further costs, there will also be free avenues of advice available in the form of existing franchisees. Speak to them to learn about costs, their experiences, both good and bad, and what you can expect if you go ahead and purchase your own franchise.

Of course, actually starting as a franchisee isn’t the end of the story when it comes to costs. Prior to doing so you will need to seriously look at the working capital you’ll require as the business gets off the ground.

Working capital is necessary for the day-to-day operation of the business and can include paying supplier invoices and maintaining the flow of products such as a restaurant franchise’s stocks of food and drink. A good franchisor should be able to indicate how much working capital is needed and for how long prior to sales and profits increasing.

There may be other fees payable once the business is up and running and again the franchisor should let you know about them before you commit. These could be Management Services Fees and a Marketing Levy – whatever they might be; you need to be aware of them.

It’s clear therefore that the overall cost of buying a franchise can vary substantially. The average initial investment for a new franchisee is £52,000 but individual expectations should be based upon homework done in advance of any purchase. Conversations with franchisors, franchisees and legal professionals will shed light on your own financial commitment as well as providing essential information on a whole host of other factors to do with the franchise.

Only after doing this will you be in a position to prepare a business plan and move to the next stage of starting up your own franchise, namely acquiring the necessary funds. This can also involve expert advice in the form of raising bank finance, for which specialist franchising support teams are able to assist at some banks.

Last Updated: 27-January-2016