How much does franchising cost?

Before buying a franchise business, it is important to consider the financial implications very carefully. Do your homework and make sure you know how much money is required and what you will be getting in return. There will be start up fees as well as recurring fees.

Start up fees

Setting up a franchise business involves an initial start up fee, payable to the franchisor at the outset. This covers the franchisors costs for setting up the business - supporting the franchise network, training, product development, advertising, promotional activities and management services.

Other initial costs

Other costs may include:

• Premises and fixtures and related professional services
• Vehicle
• Equipment
• Opening stock
• Recruitment costs

Recurring Fees

Once your franchise business is up and running, there will be ongoing payments to the franchisor. The most common recurring fees are management service fees - these will either be a percentage of turnover, a mark up on products or a flat fee.

Financing your business

You need to calculate how much money you can invest into the franchise and how much would you need to borrow. Three in five franchisees need to borrow money in order to fund the initial investment.

The main source of franchising borrowing is the major UK banks – dominated by NatWest/RBS, HSBOS and HSBC who have dedicated franchise departments. The length of a loan is typically no longer than the initial term of the franchise agreement or the premises lease. The bank may need security for the loan, for instance using property as equity or you can apply for the Department of Trade and Industry Enterprise Finance Guarantee scheme. For more details, visit www.rbs.co.uk.

To assess your loan application, a bank will need.

• Financial history e.g. statements and accounts
• Asset and liability information
• Lease information (if required)
• A business plan

Your Business Plan

A business plan explains what you hope to do, how much money you need and how you will pay the money back to ensure the business is properly funded. It should be tailored around your own individual skills and aspirations Your franchisor will help you to prepare this. Bank software is also available such as www.natwest.com/business.

As a guide, your plan will include:

• Purpose of business and objectives
• Your product or service
• People /employees
• Market and competitors
• SWOT analysis - Strengths, Opportunities, Weaknesses and Threats
• Marketing plan
• Financials - profit forecast, cash flow forecast