The unexpected costs of franchising

Businesses in the UK are feeling the brunt of rising costs. We are all told to expect the unexpected and prepare a rainy day fund but research by AXA Business Insurance found that business leaders are underestimating business costs and as a result facing nasty surprises. Franchisees are just as susceptible to unexpected costs and franchisors can often support new franchisees better by considering what other costs could be faced and need to be accounted for.

The AXA research showed that the biggest shock to businesses starting out was the cost of employees: 33% of leaders stated that salaries racked up a higher bill than they anticipated. Determining a salary for each employee is daunting for any business leader. Pay too little and risk a lack of talent; pay too much and wave goodbye to hard-earned cash. For franchisees, the suggested salary for each role will be on their franchise guide. However, many franchisees neglect to factor in the varying regional salaries.

Desirie Lea, director of Morris & Co Chartered Accountants, says it’s not as simple as some franchisees may think. “Look at it realistically – look at what the given rate in the area is. This is particularly relevant to new franchisees; they do have to look at what the going salary is in the area and whether or not they might have to pay more.” Lea suggests that salaries can be calculated according to the nature of the franchise industry along with the regional area. “You have also got the employer’s National Insurance; that is the element that the business has to pay on behalf of the employee,” warns Lea. “But, quite often, that is not necessarily factored in, particularly when the franchisees are starting out.”

For businesses new to franchising, Lea also warns that many franchisees often neglect to factor in the cost of support staff around them during the franchising process. However, employee costs can extend further than just salaries and employer obligatory costs. Many franchisors hold awards ceremonies and Christmas parties for all of their franchisees. This is a nice gesture to recognise those who have faith in the franchisor’s business model and rewarding those dedicated franchisees creates a close community and brand loyalty.

Caroline Sparks, co-founder of Turtle Tots, likes to give gifts to each franchisee at the Christmas party. “Now that we’re established, this is a normal part of our annual cashflow,” reveals Sparks. “But when we started, we thought it would be really nice to take everyone out at Christmas to say thank you but we hadn’t put the money aside to do that. You are more inclined to think about website, leaflets, marketing and getting the first franchisee.” When launching Turtle Tots, a lot of the costs in franchising were upfront and calculated accordingly. But all was not well elsewhere: Sparks and her co-founder encountered a legal issue. “We had an issue where someone breached our trademark. There’s just time and money taking legal action on that type of thing that we hadn’t really thought of,” Sparks says.

There could always be something that crops up unexpectedly and cripples finances, so having a rainy day fund for life’s hurdles can prepare leaders. Lea advises that another cost that business leaders often overlook is sickness; if a franchisee becomes ill, for example, the franchisee will need to subcontract or call somebody in to carry out operations in his or her absence.

The AXA research also found a further unexpected cost was the price of keeping a fleet moving. 13% of business leaders felt that fuel was their biggest cost; this can be particularly high for logistics franchises that rely heavily on transport. “Over the past couple of years they have taken quite a hit because the price of fuel has gone up quite a lot,” says Lea. “It’s all about planning and you just have to consider such costs. It’s difficult but it’s just about carefully monitoring and trying to control the costs whenever possible,” she says. For logistics franchises and man-and-van franchises, budgeting for any vehicle breakdown and wear and tear is vital in case of the inevitable punctured tyre or worn brakes.