The Cost of a Franchise

Anytime you look at buying a franchise you have to understand that there will be costs involved.  If you are unsure of purchasing a franchise because of the costs we might be able to help you.  We have some information to help you when calculating the costs of a franchise so that you know what the initial and ongoing fees might be. 

You have two types of fees associated with a franchise.  There are the initial costs which is what the franchisee (you) will have to pay for the licence of the business.  The licence offers you the brand name and trademark, as well as the initial business package.  The fee is charged upfront.  Usually if the franchisor has a lower cost initial fee but tends to take a larger percentage of the sales revenue they are more confident with their product or service.  In other words they have faith that they can make money through you to support their family and themselves. 

Your initial costs are the first investment you will make.  You will be investing in the premises, equipment, and the initial stock.  You will also have to establish a business entity.  Though you will hold a contractual agreement with the franchisor you still have an independent business.  Each franchise must have their own business entity which will then enter into the franchise agreement.  You may have a limited company, partnership or a sole trader business.  The costs will vary depending on the type of business entity you are.  You will want to ask your franchisor what the costs are and the specific requirements that they have regarding your business entity.

After the initial setup fees there are continuing costs.  These are usually referred to as royalties.  The royalties are paid out based on a percentage of the sales revenue.  There may also be a management service fee.  There can be a fixed management fee that you pay once depending on the franchise. 

In the franchise agreement the information regarding the initial and continuing costs should be explained and calculated for you.  Most companies require that you purchase stock straight from the franchisor rather than finding your own suppliers.  This way the franchisor controls the product.  There is usually a charge and they may mark up the prices to get more profit from you.  You should ask if they mark it up or if they offer a discount because they get a discount.  Often if you use the same supplier in multiple businesses the supplier offers you a better deal. 

Therefore the franchisor should pass this along and not price gouge you. 

Other business costs may apply.  For example if renting a space you may have to pay the franchisor each month or each year for the space.  The utilities and employees will also be continuing costs that you have to consider and calculate.  Remember that the franchise agreement should explain all the charges you have to pay including any training costs and advertising fees, which also gives you a thorough look at the costs.