The numerous areas of investment required to get started in franchising come in various shapes and sizes, so make sure you explore how to pay both up-front fees and ongoing operating costs over the life of your franchise.
The startup charge and, most likely, some form of the ongoing fee will be included in purchasing a franchise (also called royalty or service fee). Because there is so much diversity from franchise to franchise, it isn’t easy to specify what else is included in a typical start-up package. However, all possible inclusions are shopfitting, equipment, initial stock, and the first franchise fee.
The franchise cost is paid upfront.
The first price is what you pay to get the right to use the brand name in a particular region and be taught and given guidance. A franchise may cost as little as £10,000 or as much as £5 million, but according to a study by the British Franchise Association, the average cost is roughly £40,000. The initial cost is usually between 5% and 10% of the overall investment, although it may be as high as 40% or 50%.
An ongoing service charge paid weekly or monthly to your franchisor may range from zero to 20% of sales but is likely to be around 7% or 8% on average. The absence of a service charge does not imply that you will be responsible for the initial start-up costs. Mark-ups on goods and equipment may also be used to pay franchisors.
A cheap service cost is not always beneficial to you. The franchisor must maintain an ongoing interest in promoting and enhancing the business model. This can only be accomplished if the franchisee must pay the franchisor regularly.
The service charge is frequently calculated based on sales rather than profits by franchisors. This is due to the effort and expense involved in monitoring franchisee accounts to guarantee that the franchisor receives the right amount. If the charge is based on profits rather than sales, this monitoring must include expenses and revenues, making the work twice as tough.
“In most cases, franchisors prefer to base service fees on sales rather than profits.”
On the other hand, a fee based on sales might be unfavorable to the franchisee. If the business’s expenses turn out to be more than expected, the franchisee may find it difficult to pay the service charge.
If the service charge is based on sales rather than profits, you should not underestimate its amount. If your expenditures are 60% of your sales value, a service price of 10% of sales amounts to a service fee of a fourth of your profits. Before you sign, figure out the numbers.
What happens if you wish to extend your franchise deal after the initial franchise term is to keep in mind. Is it possible for the franchisor to raise the service charge amount under the terms of the contract? Try to get a better deal on this since you don’t want the franchisor to get a more significant cut of your hard work.