How much does a Franchise Cost ?

A franchise business is a great way to get started if you want to start a new business and have a better than average chance of it being a success. There are a lot of reasons why franchises have an advantage when it comes to the critical first year when most businesses fail, but a few businesses take off and become financially viable in their locality. One of the primary reasons for the medium sized and larger franchises is that you start out with the advantage of a familiar name that people trust. When people feel that they know what to expect at your business they will be more likely to come in and buy from you. Another advantage of the franchise business model is that you receive support from the franchise company, which has helped lots of managers create stores which run properly and is able to give you the advice that you need to adapt to difficulties during the start-up months (and in the future).

However despite all of these advantages, a franchise business is still subject to all of the same start-up costs that one must be ready to accept as the owner of a new business – as well as a couple of other ones which are unique to the franchise business. With the right understanding of the costs of a franchise, however, you stand a good chance of being successful with financial planning that lets you anticipate the potential areas where unexpected costs could crop up and prepare accordingly. What kinds of costs are involved in starting a new franchise business? Let’s take a look at some of them!

An expensive time in the life of a business is the start-up period when it is just being developed and put on a profit making basis. There are a lot of expenses associated with starting a new business – one-time expenses which can really add up. The typical franchise business of a small to medium size, with its own store front, costs around one hundred thousand pounds to get started. Typically this money is not paid out of the franchiser’s own pocket but it is supplied by a local bank which has been presented with a valid business plan. The business plan must explain the various anticipated costs and the projected profits of the company, with a clear sense of how the money will be successfully repaid in the future.

Costs for the starting months of the business which are the same for both franchise businesses and all other businesses include the lease (one of your largest permanent costs), utilities such as electricity, water and gas, and the cost of all of the materials that you need to either build a store on a site or to convert the site that you have rented into a store by adding signs, front pieces, counters, tables, chairs and anything else that gives the store its functionality and look. If you are building a restaurant franchise (one of the most popular franchises which also suffer the highest rates of failure – in part due to its large expenses!) then you will need a kitchen with all new equipment: counters, stoves / ovens, a refrigerator and all of the utensils and kitchenware that it takes to create food.

A tip learned by many people who have created successful franchise businesses is to spend as much time as you can haggling over the price of your lease. The lease is one of the fixed costs of your business – no matter how well things go a lease which is more expensive than it needs to be will continue to eat into your profits month after month, long into the future. Usually there is a surprising amount of flexibility in the terms that you can get for a lease, so take your time and talk to the property owner at length to see what kind of special terms you might be able to come to. In many cases it is possible for you to get a somewhat lower lease price for the first couple months or year of the business until it gets on its feet – another possibility is that the lease price might be lowered if you are putting money into repairs or actions which will improve the physical value of the property. If you are going to be fixing the owner’s location, you might as well get paid for it!

There is a special start-up cost which applies to the franchise business and that is the franchise fee – the franchise company will require you to pay a certain fee – usually several thousand pounds – to receive their permission to use the name of their franchise. You will have to live up to the terms of the franchise agreement, which will usually include specifications on how you can run certain aspects of the business (to make it perform the same way as other stores in the franchise and provide a reliable experience for the customers whose opinions build the brand) – if you do not run the business in the way that the franchise agreement permits then you may risk incurring financial penalties or losing the use of the brand.

Once you pay your franchise fee, buy the location, set up the location and get the doors open so that customers can start coming in, you have passed the first significant hurdle to having a successful franchise business! The next couple months will see whether you are able to understand the running costs of the operation and to make enough money to pay for those running costs. Every business has some costs that are unavoidable and which comprise the bottom line of the business – for the franchise business you will usually have the added cost of a certain percentage fee of your earnings which goes to the franchise company. Because of this fee you will continue to receive support from the franchise company in the form of special discounts on materials that you need, as well as lots of tips and help with marketing (since the franchise company is helping to build the brand for you).

Other permanent costs of the business are the cost of employees (which you will always want to have a slight oversupply of, for when people have to leave work for one reason or another and you need someone to keep your store running), the ongoing cost of the lease (which you hopefully negotiated a nice low price for) and the cost of utilities and local taxes which differ depending on location and all of which are more or less fixed costs for the entire time that you business runs. Being able to handle these fixed costs is critical for your business to survive.

You can improve your cash flow and the profits of your business by negotiating special deals with your suppliers. Many first time business owners think that the best way for them to get more profit for their store is to spend money advertising and to run sales – this is a trap that causes a lot of businesses to fail, as there are basic problems with both of these approaches.

When you spend your money on advertising, you are essentially spending money on something which is being done for you anyway – as the owner of a franchise business; the franchise company is already advertising your brand. Every publication in the area, as well as tiny marketing companies that you’ve never heard of, will come to your business and offer you advertising possibilities which will eat into your profits; however, most people who come to a franchise business will come because they drove by and recognized it and because they are generally aware of the businesses in their town. As long as your franchise is visible from the road, you don’t have to worry that much about advertising.

The problem with running sales is that you are essentially throwing away your own profit in an attempt to get people’s attention. The large franchise chains run sales as part of their overall marketing scheme and to help position new products in the public consciousness – you should leave sale planning to the people who have the most experience and instead of slashing your prices you should focus on producing things that people are interested in paying for. People will pay for a product which lives up to their franchise expectations and which does what it is supposed to / is what it’s supposed to be. Remember what you bought the franchise for – that familiarity with a name and products that people know they want to buy, and do not throw money away on sales.

By keeping these various costs in mind as you start a new franchise you can increase the odds that you will be able to have a successful first year, get your new franchise location on a paying basis, and make a business which will withstand the test of time to thrive in your own community!