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The unexpected costs of franchising

Written by Jade Saunders on Tuesday, 07 April 2015. Posted in Finance

Franchisors need to be increasingly mindful when finalising the predicted franchise costs for franchisees, whilst franchisees need account for small costs racking up

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.

Other costs that raised eyebrows were stationery and printer ink: 13% of those surveyed by AXA revealed that the cost of fine stationery racked up higher costs than anticipated. “I think most of our franchisees have a bit of a penchant for stationery,” Sparks jokes. “I can think of one franchisee recently who thought, ‘Actually, I would really like nice envelopes to send out my stuff in,’ and those things, while they are nice to have, aren’t really essential at all.” Turtle Tots’ iconic pink and green branding is very visually pleasing when paired with matching stationery but Sparks tries to get people to pull back on the nice-to-haves and to look into the return on these expenditures. “Whenever you’re faced with any kind of expenditure, think: ‘Actually, what will the return on this expenditure be?’ Having a nice file for leaflets to go in isn’t going to bring in any more customers.”

Different franchises will encounter different costs; some are part and parcel of the business world but others are dependent on the nature of the industry. “We give potential franchisees a cashflow forecast template,” Sparks says. “On there are things like fuel and telephone bills. I think from our point of view, we try to capture everything that they could possibly be spending. But from time to time, like with any business, there are things that you don’t expect.” Sparks tells franchisees to have a contingency for anything – preparation is key to avoid most mishaps. Each franchise has their own industry specific costs. For example, many franchises working with customer data hold a regulatory cost.

“All of our franchisees (and us) have to be signed up with the ICO [Information Commissioner’s Office] because they hold personal data about all of our customers. It’s only £35 a year but those sorts of little things can get overlooked,” Sparks explains.

“The main costs for our franchisees are hiring pools in which to teach their swimming classes. Pools vary massively in what they cost, we have some pools that are £10 per hour and we have some pools that are £120 an hour,” Sparks says. “We say if you have an expensive pool, perhaps either you charge a bit more to your customers or you make sure you’ve got as many customers as you can in it so that you are not running it at a loss.” Sparks also notes that franchisees often don’t factor in their teacher kits that from time to time will need replacing due to being subject to wet and chlorinated environments.

Support from the big guys up top can go a long way for new franchisees facing the trials and tribulations of launching their own business. Turtle Tots provides a thorough cashflow forecast to franchisees, which details all of the expenditure franchisees will be making on a day to day basis. “We give them different scenarios: if you grow to teach 250 babies over the course of the first year then we think their expenditure on leaflets would be £200 for example,” Sparks says. “If you grow to teach 500 babies, then you are going to be doing a lot more mileage. So naturally, some of your expenditure will go up,” Sparks points out.

Lea advises that taking different scenarios into consideration is vital and franchisees will need to consider the costs of the region they plan to launch in. “The franchisor will have a model based on the representative cost, but the franchisee might not appreciate that some areas of the country might be more expensive. If you were to run premises based on an average cost, it might be £20k a year to rent, and that’s what the franchisors have in their model. But in London, it might cost £50k,” Lea warns.

The over-arching theme is: make sure you build in costs to cover the unexpected. “We want franchisees to come in with their eyes fully open, but inevitably there is always the odd thing that crops up,” Sparks acknowledges. 

About the Author

Jade Saunders

Jade Saunders

Saunders recently graduated with a degree in Journalism after three years of sun, sea and cider living in Cornwall. After being pried away from the pasties, she returned home to join the team at Elite Franchise combining her passion for entrepreneurship and her love of writing. Saunders busies herself co-owning a clothing company, Undead Glory, and has her hands full with her french bulldog puppy and partner in crime, Herbie.

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