Richard Pakey discusses the financial commitments involved when joining a franchise network.
Whenever someone quits the security of a well-paid job, to start their own business, the person in question will experience a whole host of emotions. There will be fear, or an overwhelming feeling of anxiety about leaving what may be a safe comfortable position of employment. And despite doing all the necessary research before making an informed decision about your future, this is never an easy step to take.
Over recent months I have discussed the advantages of taking on a franchise, rather than setting up an independent start-up business. But the time has now arrived to make that leap of faith. So what is the true financial cost of making that switch? In short, the full financial outlay will certainly be far greater than the initial franchise fee itself.
The Franchise Fee
It might feel, at times, as though the franchisor has simply plucked this figure out of the sky. However, careful consideration should be taken regarding the value of this fee. This is the first hurdle you will need to clear, while the franchisor closely monitors your speed and ability to pay it.
This fee will cover both initial and on-going training costs, along with the expert advice being provided by the franchisor to help get you launched. Advice may include assistance in finding an ideal location and property for your bricks and mortar franchise – if that’s what you have. The fee may also include marketing material, and/or your own online site created by the franchisor.
The fee will grant you exclusive rights to a territory which no other franchisee can use. This includes the franchisor who has given up his or her own rights to expand their business into this particular region. This provides exclusivity of territory for the franchisee. But before signing on the dotted line you should always ask for a full list of rights that you will receive by paying this franchise fee.
All franchise fees, whether small or large, will depend on the nature of the business. These vary from the aforementioned bricks and mortar, to one which may be based at home, or one that is mobile (such as food vans attending venues). It will also vary, depending on how well-established the brand already is. The fee for a high-profile brand is likely to cost considerably more than a less well-known one.
Professional Advice
You should always obtain professional assistance before purchasing a franchise. This is especially important for first-time business owners. All franchise packs include terminology which will require clarification. The UK is an unregulated market for franchising, and within one of these packs you may find a reference to a Franchise Disclosure Document (FDD). But please don’t be concerned or alarmed by this.
FDD is simply a legal disclosure document given to individuals interested in buying a franchise in the United States, and forms part of any pre-sale due diligence process. Thankfully, most UK brands would not produce an actual FDD but would instead ensure you receive as much detail about the franchise as possible. This will enable you to make a more informed choice further down the line – if required.
Therefore, professional advice will help to clear up any issues you fail to understand regarding a franchise document. Some franchise agreements insist that you seek independent professional guidance – and you must prove this to the franchisor. But always consider legal and accountancy fees to be an investment, rather than an additional compulsory cost.
Additional Cash Requirements
These are often no different to those incurred on a daily, weekly or monthly basis during day-to-day living. These include mortgage or rent, vehicle purchase or hire, taxes, insurance, maintenance and repairs etc. These will continue but are hopefully more than offset by revenues earned through the business.
Many businesses do not fail because they are not profitable, but they simply run out of cash. Ensure your cash flow is large enough to cope with these bills during the early stages of being in business. Adequate funding of a business is vital and many franchisors will require proof of this.
Retail Franchises
Once a site has been sourced, and verified by the franchisor, you will now face the cost of fitting these premises out. And the larger the site, the greater the costs! Your franchisor should be able to advise you on the cost per square yardage. These costs can be considerable and you may require a bank loan to cover this amount – or certainly part of it.
Other on-going costs include paying suppliers. For example, you may need to stock the shelves with food or clothes, before opening your store. This can often be acquired on credit, and therefore funded by turnover of stock. And while covering the cost of the business may be possible, you will also need to ensure there is enough money left in the pot for taking care of your family.
This must cover the entire period from initial training through to making a profit. Putting a financial strain on the family is the last thing anyone wants. Franchising allows you to own and run a business, but be aware of the total costs before committing to a new way of life. For more information and advice about purchasing a franchise, please contact me.
