Franchising is often called a ‘business in a box’, and it is, but the price you see advertised doesn’t always give you the full picture, so it’s important to find out exactly how much cash will be leaving your bank account, before you invest in your first franchise.
As a franchisor I welcome people to our industry. Happy franchisees naturally become brand advocates for the sector, which is good for all of us, however, I’m sometimes concerned that the advertised price of franchise opportunities, doesn’t always represent the true and final cost, so I hope this article will help you know what to look out for and what questions to ask, to ascertain all the costs associated with buying a franchise.
Your personal monthly financial commitments
Let’s say, for argument’s sake, you are thinking of buying a ‘green field’ franchise territory (eg brand new), you are currently employed, and are going to use savings or a loan to cover the purchase cost of the franchise. Great.
Now, when you sit down to write your business plan, you’ll need to factor in that the moment you leave your job and start up your franchise, your income will dry up, but your regular bills won’t, so you need to make sure you have enough in reserve, or that you have borrowed enough, to get you through the first 12 months, a time when you cannot guarantee any income, (unless you are buying a resale franchise, which is already up and running, in which case you’ll know exactly how much it brings in each month.)
If you have redundancy money this may cover all your expenses, but for many they will need finance. Talk to your franchisor, many have pre-existing arrangements to help you get bank loans to finance your purchase.
This might sound like a terrifying scenario but 99% of franchisees have been through this and made it out the other side successfully, and remember, if you were starting up your own business from scratch, the financial issues would be the same, the only difference is when buying a franchise, you are much more likely to be successful in getting a bank loan, as you are buying a business based on a tried and tested method, and your chances of overall success knock self-start ups into the proverbial cocked hat.
Franchising Facts
According to new analysis (October 2023)1 from Experian, around 4% of new businesses have ceased trading by the end of the first year of operations, and the failure rate rises significantly to more than a third (34%) by the end of the second and to half (50%) within just three years of opening.
Comparatively, franchises offer a much higher rate of success with fewer than 1% per year2 closing due to commercial failure.
Cut your cloth accordingly
The phrase ‘Look after the pennies and the pounds will look after themselves’ has never been more pertinent than in the first year of owning a franchise. Whilst you are in this ‘lean’ period, think carefully about all your financial commitments and look at where you can make savings. Do you have a gym membership? Can you pause it for six months or so? Can you cut down on petrol and car usage? Do you need all the satellite subscriptions, or can you drop a couple? Do you usually have takeaways or eat out a few times a week? Can you shelve those until the money starts rolling in? Making small cuts will really help as you establish your new business.
Accountancy Fees
Many franchisees are surprised they need to pay for an accountant each month, but unless you have been doing your own books for years, we’d highly suggest you do. You focus on the franchise, let the accountants focus on keeping your business on the right side of the law and paying VAT and taxes as necessary.
A van and sign writing
Many franchisors conveniently ‘forget’ to mention this when advertising their opportunity. For van-based businesses you are going to have to buy a van and it will need to be sign written in the brand style. Yes, there are lease options, yes, you can choose an older model but if it is your work-horse, doubling as transport and advertising, you are going to want something reliable and that might not be cheap.
Premises
It goes without saying that if you are choosing a retail franchise you are going to need premises and you don’t need me to tell you how expensive this might be. Absolutely not a reason not to do it, just be aware that you need to factor the costs in.
Franchising – a great investment
As a member of the BFA (British Franchise Association), we are committed to promoting ethical franchising, making sure people have all the facts before they make a commitment. Franchising isn’t a fast route to earning money and you should avoid anyone who tells you otherwise; what it is, however, is a secure route to building a sustainable income. It is an investment, that you need to research fully before making a commitment and we’d urge you to visit the BFA website www.thebfa.org to find out more.
1 Experian – Half of all new businesses fail within three years of opening
2 bfa Industry research
