Aspiring entrepreneurs who have decided to pursue a franchising opportunity know that buying a franchise is possibly one of the biggest investments they will make in their lives. But this investment is worth it in most cases in an industry that’s worth around £17 billion in the UK alone. Not only do prospective franchisees have the opportunity to work under the umbrella of a recognised brand.
They also get extensive support and exclusive access to the franchisor’s intellectual property as well as proprietary systems and processes. With such advantages, it’s easy to conclude that buying a franchise can be a much more affordable and rewarding way of running a business while receiving support. Despite this, there still remain multiple misconceptions about the typical franchise fees and royalties.
In order to clarify these, it’s essential to understand the most common costs involved in buying a franchise and here, you’ll be able to find an extensive list of franchise costs to help you make a more informed investment decision.
Table of contents:
Initial costs
One of the primary factors that influence a prospective franchisee in deciding whether or not to pursue a franchise opportunity includes the hidden costs of buying a franchise. However, if studied in depth, franchising costs are often not “hidden” as presumed.
Rather they are costs that must be incurred by the franchisee in order to gain access to operating a business based on the franchisor’s successful business model, among other things.
With this in mind, it’s crucial to have a deeper understanding of the upfront costs involved in buying a franchise.
So, without further ado, here is a breakdown of the primary initial franchise costs in the UK.
Initial franchise fee
This fee can be broadly referred to as the “price tag” for buying into the franchise business. It’s considered the cost of entry. This fee is generally uniform across a specific franchise unit and is not negotiable.
One of the reasons for this uniformity is that every franchisee needs to know that they are operating their business unit on an equal basis as the rest.
Hence, initial franchisees are generally non-negotiable.
In addition, the franchisor takes multiple factors into account when calculating this initial fee. These may include initial support, initial training, site selection and site development, advertising, grand opening support and others.
Start-up costs
A frequent misconception when it comes to a franchisee’s initial costs is that the initial franchise fee covers everything they need to get started. While this fee indeed gives a franchisee access to use a franchisor’s brand, intellectual property, proprietary systems and processes, it does not cover the cost of the full investment required to get the business off the ground.
As such, liquid capital or working capital in the form of start-up costs will be required.
These costs can vary and can exceed the amount of the initial franchise fee. It is used for building a brick-and-mortar outlet, paying staffing fees, etc.
It is also used to help a franchisee during their first few months in business until they break even or turn a profit.
Travel costs
Travel costs, although not as significant as the initial franchise fee or the start-up costs, are another cost that must be factored into the initial fee amount.
One of the biggest travel costs a prospective franchisee may have includes the cost to travel to the franchisor’s headquarters for discovery day. This will not only include flights/driving/taxis, etc., but it will also involve hotels and accommodation, food and related expenses.
Prospective franchisees are typically required to cover these costs on their own. One reason for this is for the franchisor to determine and suss out whether the prospective franchisee is in fact serious about pursuing the opportunity being presented.
Building and construction costs
Franchise opportunities can vary from home-based to those situated in brick-and-mortar locations. In the case of the latter, a significant investment will be required to identify, develop and build the site in question.
Related costs that form a part of this sub-category of costs include: using the services of a real estate agent, zoning and construction fees, costs of construction, paint, decor and furniture, signage and branding, etc.
Equipment
Whereas some franchise opportunities do not require a significant investment in equipment and only a phone and computer are required, others such as a restaurant or fast food franchise restaurant will require kitchen fit out and other equipment in order to succeed.
This equipment can be costly, depending on the opportunity in question and should be clarified with the franchisor before signing the franchise agreement.
Legal advice
Legal advice is included here because the services of a franchise lawyer, accountant and/or consultant will be invaluable in helping you sift through each clause in the franchise agreement to gain a deep understanding of your rights and obligations as a franchisee.
Legal costs can add up and rather than not factoring them in, it would be wise to make provision for them to ensure you’re legally covered from every angle.
Day-to-day operation costs
It’s important for a franchisee to be aware that apart from the initial costs and capital requirements required prior to signing the franchise agreement, there are also ongoing franchise costs that are incurred by franchisees.
They can be divided into the following sub-categories of fees:
Ongoing fees/royalties
Franchise royalty fees are considered to be the franchisor’s main source of income. However, how these are determined and charged for will vary in each individual franchisor’s case.
While most royalty payments are paid on a monthly basis, the means of calculating them differs. For example, some ongoing royalty payments will be calculated as a percentage of turnover/income/revenue etc., others are a fixed amount that will remain constant irrespective of the franchisee’s financial performance.
In addition to this, the amount of the royalties paid can entitle franchisees to receive ongoing education and training; revisions to operating manuals; software upgrades; business consulting; administrative support; etc.
Material sourcing costs
As the name suggests, these costs are related to materials that a franchisee will need on an ongoing basis in order for their business to operate on an uninterrupted basis.
For example, a restaurant business franchisee will need to have all the ingredients required to prepare the meals on their menu at all times.
Insurance
Another ongoing fee that should be a part of your daily operations is the cost of insurance. Insurance types differ and may include professional liability insurance; general liability insurance; commercial property insurance; business income insurance; workers’ compensation insurance; data breach insurance; commercial umbrella insurance; and others.
Business development costs
As part of the different types of franchise fees, there are also costs associated with business development. This relates to the growth and expansion of the business opportunity and may range from seeking to attract more clients to retaining them.
Advertising and marketing fund
Most franchisors have a common pool in which fees are collected from every franchisee. This pool usually goes towards a joint marketing and advertising fund.
One of the primary reasons for this is that the franchisor implements a local or national marketing strategy for the benefit of all franchisees. This fee, much like royalties, can either be fixed or a percentage of monthly turnover/sales/income, etc.
Management service fee
This fee is paid to the franchisor in exchange for the costs incurred by the franchisor for providing continuous support to the franchisee.
These fees may include franchisee monitoring and performance evaluation, continuing research, franchise development, the organisation of meetings, etc.
Franchise renewal/resale fee
The final fee that is often neglected in discussions between a franchisor and a prospective franchisee is the cost of franchise renewal and resale.
Although not every franchisor charges renewal fees at the end of the franchise agreement period to extend the franchisee’s rights to operate the franchise, these can still be significant.
Furthermore, the costs of franchise resale and the conditions in such scenarios should also be considered in calculating all costs involved in buying a franchise opportunity.
Concluding remarks
When broken down into categories, franchise costs and fees can be easy to understand and furthermore – calculated with more precision. When embarking on this step, this should give you, the prospective franchisee, a clearer idea of your current level of finances and what is required for you to make the investment into a franchise opportunity.
And if you’re still wondering about franchise opportunities altogether, and you’re overwhelmed by all the options available, why not browse through our franchise portal? It’s one of the industry’s most comprehensive platforms where you can compare and find out more about different franchise options so that you can make the right decision.
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