Money makes the world go round and if you’re a franchisee eager to jump on its merry-go-round you better learn the money talk
Finance is one of the biggest concerns for prospective franchisees. And it doesn’t help since the franchise industry quite often has its own jargon. Fear not, if you’re trying to weigh up your options but have blurred financial vision, I’ve picked some of the most common terms in franchising to demystify.
First up is the franchise fee. Simply put, this is the initial fee that’s paid to the franchisor to become a franchisee. Depending on the brand, this will include things like your initial training, a dedicated, protected territory and starting stock or materials needed to launch. It’s usually the same for everyone although the exact figure can be subject to change based on territory size and location.
Working capital is another term that might confuse some franchisees. This is the amount of money needed to get your franchise off the ground – from rent and rates to staff, product and technology costs. But working capital doesn’t just relate to the business. You still have a personal life that needs paying for, including rainy day and emergency funds, so calculating your working capital requirement is an important part of your decision-making process. Money doesn’t come in straightaway from any new business, so it’s crucial to have sufficient working capital to rely on in the meantime.
Next we have cashflow, which doesn’t just pertain to money going in and out of your company. Your cashflow forms an essential part of your business plan – meaning a working document acting as a viability check and helps to secure funding in the first place as well as a vital monthly management tool when your franchise is up and running. If regularly consulted, your business plan and cashflow can be amended to reflect what’s really going on so both franchisee and franchisor can react appropriately.
Royalty fees and management service fees (MSF) means the same thing – a percentage of gross sales, though some brands operate on a fixed fee basis. The MSF covers things like ongoing and ever-evolving support for the life of your franchise as well as innovation in products and the service to keep the brand at the forefront of the market. After all, franchising is a two-way-street.
Some brands also have a marketing fee and, just like royalties, they’re usually a percentage of turnover. This money is put into a metaphorical pot and used for national marketing purposes for the benefit of the whole network, not just certain individuals. What it can do is fund things like specifically themed marketing campaigns, investment into external specialists and network-wide activity.
Money is one of the hardest things to talk about. But there are many experts and professionals you can turn to for advice and support. The big takeaway here is, if you’re unsure – ask. With most high street banks offering business loans to cover up to 70% of your franchise costs, you can rest assured that you won’t be battling the money monster alone.