The Costs Associated with Franchising

The most common questions about franchising usually revolve around the costs. In other words, how much does it cost to launch a franchise business? It is an excellent question and one that must be viewed in its entirety to fully appreciate the value that a franchise model can bring to a budding business owner.

Before jumping into the various costs associated with franchising, we will first get a broader comparison between the costs associated with franchising vs. the cost associated with a typical business start-up. This lays the foundation for fully understanding each cost area and what you get for your investment.

Franchising Vs. Start-up

The overarching conclusion is that the costs of starting an independent business and perfecting its business model will almost always eclipse the costs of starting a franchised business. 

The overarching conclusion is that the costs of starting an independent business and perfecting its business model will almost always eclipse the costs of starting a franchised business. 

With a franchise, the true value that you are getting from your investment is a proven business model. In other words, it is that A-Z blueprint on who your target customers are, how you go about reaching them in a scalable and systematic way, the product/services that you deliver to them in order to generate a profit, the back office functions you need to make it all work and, in some cases, the systems that you need to employ, train and delegate to a team of people who can deliver for you.

With a franchise, the true value that you are getting from your investment is a proven business model. In other words, it is that A-Z blueprint.

On top of this you operate under an established brand with a proven track record, giving you instant credibility, testimonials, and case studies. Furthermore, you have the ongoing support of head office, who will support you in growing your business, connect you with fellow franchisees, keep you updated with the latest market developments and possibly even give you access to resources such as national accounts.

In comparison when you start a business independently you are essentially starting with a blank canvass.

In comparison when you start a business independently you are essentially starting with a blank canvass. You must figure out who your customers are, how you go about reaching them, what products or services they REALLY want (not what you think they want) and how to deliver those products/services in a way that you do not overprice/undersell yourself (both of which impacts your profit). Once you have figured this stuff out you then need to build systems to support this and begin transforming from an overworked employee to a business owner.

Unfortunately, business start-ups are a process of trial and error and the primary reason for failure is that people simply run out of money before they get a chance to figure all this stuff out.

Even if you have experience in a particular industry, people grossly underestimate just how much there is to be done and the true costs associated with starting an independent business. Unfortunately, business start-ups are a process of trial and error and the primary reason for failure is that people simply run out of money before they get a chance to figure all this stuff out.

With a franchise you have a well-trodden path and timeframe to success, with many white collar franchisees getting their initial investment back within two years.

While a white-collar franchise may require a total investment of circa £25,000 to £75,000 including working capital, a business start-up could easily cost you well into the hundreds of thousands. With a franchise you have a well-trodden path and timeframe to success, with many white collar franchisees getting their initial investment back within two years. With a business start-up, the timeframe to success is unknown and in a large number of cases, never even happens.

Costs Associated with Franchising

With a broader understanding and comparison in mind, let’s take a closer look at the individual costs associated with franchising, why they are there and what they represent.

Franchise Fees

The upfront franchise fee is essentially the setup costs that you pay to join a franchise. This fee covers a multitude of things including the right to use the business model, your license to operate under the brand of the franchisor, full training to get you up and running and some of the initial business setup costs. Very often the franchise fee includes a sales and marketing package to help you get your first customers through the door and will incorporate mechanisms such as one-to-one mentoring to help you maximise every sales opportunity and get your business up faster.

Very often the franchise fee includes a sales and marketing package to help you get your first customers through the door and will incorporate mechanisms such as one-to-one mentoring to help you maximise every sales opportunity and get your business up faster.

What the franchise fee does not include is capital equipment, furnishings, fixtures, or any of the costs associated with setting up an office. However, if you are operating from a premises, the franchisor will usually help you with identifying and acquiring the right sites and connect you with suppliers for fitting out, etc.

It is important to remember that most start-up businesses will spend significantly more than the initial franchise fee in setting up and trying to figure everything out.

It is important to remember that most start-up businesses will spend significantly more than the initial franchise fee in setting up and trying to figure everything out. For example, a decent website with branding will cost anywhere between £2,500 and £5,000 (if you are lucky) and take months to put into place. At this point you have not even opened your doors for business, so the timeframe of getting that money back is instantly extended. 

Franchising can be particularly powerful if you are exploring it as a second career, as you will not want to wait five years while you put everything into place (or even take on the risk of doing so).

The advantages of having a franchise business are huge, primarily because you can shortcut directly to the ‘making money’ part, without having to figure everything out that comes before it. Franchising can be particularly powerful if you are exploring it as a second career, as you will not want to wait five years while you put everything into place (or even take on the risk of doing so).

Royalty

The royalty is a fee that covers ongoing training and support. It is a mechanism that aligns the franchisor with the franchisee, or in other words, the franchisor becomes successful when you are successful. This is the basic premise of franchising and what makes it so exciting.

The royalty is a fee that covers ongoing training and support. It is a mechanism that aligns the franchisor with the franchisee, or in other words, the franchisor becomes successful when you are successful. This is the basic premise of franchising and what makes it so exciting.

The royalty normally covers a variety of things including regular training, ongoing specialist support from head office (i.e., a dedicated marketing manager, dedicated finance function, etc), access to large buying groups and vendor level discounts, continuous improvement to the business model and much more.

The royalty ranges anywhere from 4-30% of gross sales, depending on the type of franchise that you are in. In white collar franchising, the royalty is usually somewhere between 10-20% of gross sales.

While those new to franchising first perceive the royalty as a cost centre, it is in fact a profit centre.

While those new to franchising first perceive the royalty as a cost centre, it is in fact a profit centre. The ongoing specialist training and support allows you to build a better business in a faster timeframe than if you were operating independently and it tends to pay for itself several times over.

Marketing Contribution

The marketing contribution is a small levy that you pay back to the franchisor to contribute to national marketing initiatives. It is usually a percentage of gross sales, that typically range from 1-2% and is paid into a central pot ready for deployment.

It is important to note that the Marketing Contribution is not a profit centre for a franchisor. It is specifically used to help drive customer awareness and generate sales.

It is important to note that the Marketing Contribution is not a profit centre for a franchisor. It is specifically used to help drive customer awareness and generate sales. Very often, there will be a committee within the franchise network that comprises of franchisees who will help decide how to best use these funds.

Working Capital

While not exclusive to franchising, it is important to remember that alongside your initial investment and setup fees you are going to need cash for working capital. How much cash you will need depends largely on the type of business you are starting. If you are launching as a business advisor, then you are going to need much less working capital than if you were opening a retail location and had staff salaries to pay from day one.

As a typical rule of thumb, you will want a minimum of 6 months working capital to give you enough cushion to get your business going. Ideally, you will have closer to 12 months working capital available to see you through the first year, which is always the hardest.

As a typical rule of thumb, you will want a minimum of 6 months working capital to give you enough cushion to get your business going. Ideally, you will have closer to 12 months working capital available to see you through the first year, which is always the hardest.

Personal Cash

Like working capital, you will need to account for your personal living expenses during your business launch phase. This is particularly important if you are currently earning a regular salary and depend solely on this income for all your living expenses.

Like working capital, you will need to account for your personal living expenses during your business launch phase. This is particularly important if you are currently earning a regular salary and depend solely on this income for all your living expenses.

As before, you will want a minimum of 6 months personal cash available with ideally closer to 12 months at hand. Starting a business is all about setting yourself up for success – the more cushion you can give yourself, the better.

Conclusion

When reviewing the costs associated with franchising it is important to analyse them in comparison to setting up independently. Only then can you make a true like-for-like comparison and analyse whether it is right for you.

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