When calculating the likely cost of a franchise, you need to take both initial start-up costs and ongoing fees, usually linked to the income or profits of the franchise, into account.
Initial costs of a franchise
The franchisor - the business that sells you the franchise - usually charges an up-front initial fee. If the franchisor relies mainly on taking a percentage of your sales revenue, rather than on a high initial fee, it is usually a good indication that they have confidence in the value of their product or service.
Your largest initial costs are usually your investment in:
- initial stock
You will need to establish a business entity or structure. Although a franchisee holds a contractual agreement with the franchisor, each franchisee is an independent business - and it is this business entity that will enter into the franchise agreement. Your chosen business structure could be a limited company, partnership or sole trader - each of which will involve different costs - or your franchisor might have specific requirements. See legal structures: the basics.
Ongoing costs of a franchise
There are a number of ongoing costs including:
- You usually pay a percentage of the sales revenue to the franchisor by way of a management service fee. Alternatively, you may pay a fixed management fee of some kind.
- Under the terms of the franchise agreement, you may have to buy stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their buying power.
- You also have to pay the usual business costs - for example, rent for premises, utility bills or the costs of any employees you take on. Again, check if the things that you pay for through the franchisor have a realistic cost.
- Check too if the agreement includes additional charges. For example, you may be required to pay for training, or to contribute to the cost of national advertising campaigns.