The Hidden Costs of Buying a Franchise

date icon 5 minutes to read date icon 23rd January, 2023

Franchising is a major investment decision that will have an impact on your life for the duration of the franchise agreement. Because it can involve significant costs – depending on the franchise opportunity you choose – you need to be aware of all the franchise costs (including those that appear to be “hidden”) when determining what costs are involved in buying a franchise.

Remember that your franchisor isn’t trying to hide anything from you. But when they advertise their franchise opportunities, some costs may not be mentioned outright and will only be revealed later on during the “discovery” process and most probably in your franchise agreement.

To avoid any surprises, you should be aware of all the potential costs involved. So, if you want to find out what are the fees and costs of a franchise – both “hidden” and upfront – take a look below.

What fees do you have to pay when you buy a franchise?

The two most typical franchising costs that a prospective franchisee will be aware of are the initial franchise fee and the ongoing royalty payments. These are the most common costs associated with buying a franchise.

However, there are other costs that franchisors usually don’t go into much detail about. These costs however are still important to factor in to see if you’ll be able to stay afloat until your business breaks even and starts turning a profit.

So, without further ado, here are some franchise costs that are often overlooked.

The hidden costs of buying a franchise

business cost growth concept

A comprehensive “hidden” list of franchise costs is discussed in more detail below.

Take a look at what costs you should be aware of before buying into a franchise opportunity and make sure that you have the necessary financial resources to cover them.

1. Travel costs

The very first “hidden” cost is the cost that covers your travel, food and accommodation to visit the franchisor’s headquarters during Discovery Day.

In a way, the franchisor is “testing” you to see whether you are ready and willing to make a financial, time and resource commitment before you even meet each other.

2. Working capital

Many prospective franchisees are under the impression that the initial franchise fee covers working capital costs. However, resources required to source equipment, cover building and construction costs as well as materials are often not included.

The initial franchise fee is the sort of “licence” to operate the business using the parent brand’s intellectual property and proprietary systems. But working capital is often excluded from this fee and needs to be sourced separately.

Depending on the franchise opportunity, working capital can be low or high. A hotel franchise, for example, will cost a lot more to construct than a dog grooming franchise which can be mobile and require no rental costs for premises.

3. Interest foregone

You also need to calculate your franchise return on investment and consider whether other investment opportunities such as passive investment from a rental property, for instance, will earn you more over the long term.

This interest foregone is a cost few consider but it is the cost of choosing to run a franchise business over another opportunity you could have pursued.

It’s also the interest that could have accrued on your savings if you did not choose to invest in a franchise.

4. Bulk buying mark-ups

Some franchisors may emphasise the fact that they offer group purchasing discounts from pre-approved suppliers.

Although this may seem attractive at first glance, you should consider the amount of the mark-up the franchisor places on the group purchase items and whether you actually benefit from it.

Alternatively, the mark-up may be so high that you get no realistic benefit from such discounts in the first place.

5. Professional service fees

Although these are often overlooked as part of the franchise buying process, professional service fees can quickly add up and set your business plans back.

The services provided by franchise lawyers, accountants, builders and architects may not be ongoing or continuous but they can be quite expensive in the setting up and running of your franchise.

6. Insurance cover

One of the requirements your franchisor may stipulate in the franchise agreement is that you need to have different types of insurance cover. This is often a requirement but is not always stated explicitly.

7. Marketing and advertising fund fees

In addition, in order for franchisors to provide a cohesive brand identity, they require franchisees to pay a certain amount (fixed or a percentage) towards a marketing and advertising fund.

Franchisees should take an interest in what the franchisor does in terms of developing this fund and what benefits the franchisee can expect to receive as a result of pooling funds toward it.

8. Franchise renewal fee

Getting caught up in the excitement of buying an off-the-shelf business, many franchisees also often overlook the franchise renewal fee. This is a fee when the franchise agreement is extended after the initial agreement period has passed.

Granted, there are some franchisors who waive this fee altogether. But should you wish to continue operating under the parent brand’s name after this time, you need to be aware of how much it will cost you as well.

9. Franchise resale fee

Alternatively to a franchise renewal fee, there is also the franchise resale fee. This is a fee when you wish to exit the franchise business and agreement that you’ve entered into with the franchisor.

It can be prior to the end of your contract period or it can take place at the end of this period. This is often a small fee that’s paid to the franchisor and, even though it will depend on the franchisor to cover costs of administration and training the new owner, it’s still a fee that’s often not discussed in sufficient depth.

In a nutshell

No franchisor is out there to mislead a prospective franchisee of the costs involved in buying their franchise opportunity. However, some costs are often only disclosed later on in the discussions building up to the signing of the franchise agreement.

When doing your due diligence, it’s crucial to look at the bigger picture from start to finish in order to get a solid figure when it comes to the total cost of franchising.

And if you are ready to begin your search for the perfect franchise opportunity but don’t know where to start, our comprehensive franchise portal is a great place to start.

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