Dealing with the costs of running a franchise
Put simply, a franchise is a method of distributing business goods or services. It’s a way of structuring your business to maximise growth while minimising costs, and it pays. 90% of franchisees report profitability in the first two years, and over half of them claim an annual turnover of over £250,000. That’s not to say reaching this point is easy. There’s a lot of hard work and strategic decisions involved in running a successful franchise, most of which depend on cost management.
Like with any new business, running a franchise costs a lot in the early days. But often, an already established and loyal customer base makes the period of no profits shorter than brand new startups. But, the cost of starting franchises varies depending on what type of business you are going to run. To make sure your franchise is a success, you need to consider where this money will come from. These are the costs involved:
- Franchise fee: The one-off, up-front fee that you pay to the franchiser for the right to use their name and business concept. On average, this can range from £5,000 to £300,000.
- Start-up costs: Depending on the nature of the franchise you might need furniture, fixtures, equipment, and signage.
- Working capital: Until the business is making a profit you’ll need money to pay suppliers, staff and other expenses.
- Franchise royalty fees: This could be a fixed monthly fee for ongoing rights to the franchise, or a percentage of profits or sales revenue.
- Advertising and promotional fees: You may need to contribute to ongoing promotions and marketing activity happening at a national level. Or, you might need to spend a certain amount on local advertising each month.
- Other possible costs: Franchise renewal fees, resale fees, professional services like lawyers, architects, and accountants, and insurance coverage.
Where does all this money come from?
Using your own money is always a possibility if you have been saving over the years, or have been in the franchising business for a while. If not, banks consider franchising a relatively safe investment and are usually willing to lend to new franchisees. You know you have an effective business model, and you’ll receive training from your franchiser. But, to be successful, you’ll still need to be meticulous when it comes to your loan application.
Before you start loan shopping, research your franchise costs. You need to be sure how much you need. Only then can you go about creating a business plan for your franchise. It’s useful to look for lenders that have experience in dealing with the franchise market. Most high-street banks have a specialist franchise team. Also, it is worth looking into other sources of finance for your franchise. For example, there are government grants and initiatives that offer unsecured personal loans of up to £25,000 to small franchises with viable business plans.
All this planning is a lot to take on by yourself if you’re entirely new to the world of franchising. Help from experienced business advisers will make the process more straightforward and be better for you in the long run. But some business advisers aren’t as knowledgeable as they make out, so you need to be sure they have a history of success, and that they can be trusted.
You can trust Big Hand to give you our best, professional business advice. We do everything possible, from managing your bookkeeping to giving you sound advise to ensure your business as profitable as it can be. That includes us managing your accounting so you have one less thing to worry about. Get in touch today to find out more on 0161 327 2911.