Costs involved in buying a franchise

When you buy a franchise, there are a few costs involved that you need to consider before investing. This article will list all the costs involved when you buy a franchise. This should help you decide whether buying a franchise would be right for you. Even though you would need to ask your franchisor to find out the exact costs, you’ll be liable for what comes with your chosen franchise from the initial stages to when the business is up and running. This article will list the standard costs that come with most franchises since every franchise has different costs and models.

Capital investment

As the franchisee, you are responsible for funding the requirements of the franchisor for your franchise location. This can be as simple as a purchase of a van and tools, but sometimes it can even involve renting and costs such as refurbishment. As every franchise works differently, some franchises may be more simple where you purchase what is called a ‘turnkey’ franchise operation. This is where a franchisor would acquire and organize the premises for you and then hand the franchise ownership over to you once it is ready.

The franchise fee

The initial franchise fee is usually the most expensive fee you have to pay on your journey to becoming a franchise owner. This fee can usually range from anywhere between £300 all the way to £250,000 and up, depending on which franchise you decide to make an investment in. The reason why this is usually the most expensive fee is because this is a fee structure designed to cover many aspects of your franchise business, such as:

  • Your training as a new franchisee
  • Access to the proven business model
  • Access to the necessary equipment required to run the franchise
  • The rights to use the companies brand name to trade under
  • Recruitment and staffing for your franchise
  • Reimbursement for the costs to the franchisor involved in turning their business into a franchise

Working capital

Many new people to franchising may believe that once you pay the initial franchise fee, that means that all the costs are covered. This is simply not true since, in reality, there are many other costs that are associated with running a franchises day to day operations, such as paying suppliers and expenses for the franchise businesses day to day operations. One of the main benefits of buying a franchise is that you get access to the franchisors knowledge of the industry from day one, such as how much capital you will need to begin with, and another benefit of investing in a franchise is that you will be trading under a brand name that is trusted and established either nationally or internationally.

The ongoing fees you will need to pay when running your franchise

After paying your basic setup costs, such as your franchise fee and the required capital to run the franchises day to day operations, there is one final fee you are required to pay in order to continue running your franchise which is called a franchise royalty fee which can work in two ways as we will list below:

  1. A fixed fee – this is where you would have to pay your franchisor a fixed fee each month to continue trading under the franchisors brand. Although this fee is not very common in franchising, some franchises may use this fee structure for their franchisees.
  2. A percentage fee – this is where your fee would be calculated depending on the sales you make while running the franchise each month.

Other costs to consider when buying a franchise:

Advertising fees

This is another ongoing fee depending on how long your marketing campaign is. This is where a franchisor would help you market your franchise for an extra fee. The benefit of using a franchisor to help you market your franchise is that they have experience in the field, meaning their advice is more likely to generate sales than going it alone with your marketing campaigns since this could lead to high costs without seeing much benefit and this is something that you would want to avoid especially when you are a new franchisee when you need customers most.

Franchise renewal fee

Extending the contract for your franchise may include a renewal fee. If this is the case for the franchise you are considering investing in, this should be stated within the franchise agreement.

Franchise resale fee

If you are planning to sell your franchise as a franchisee, you will be expected to pay a fee to the franchisor to cover the costs that will be associated with the franchisor upon taking on a new franchisee in that location.

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