Posted on: 30 January 2015
As with any startup, finding enough of the right kind of capital to make the business a success is a vital early step. For franchisees, the initial costs include (but are not limited to):
- Initial franchise fee – this can vary (for McDonalds and Right at Home it’s about £30,000) and sometimes includes a training fee
- Rental of premises
- Opening stock
- Office and other equipment
- Professional fees (such as a lawyer, franchise consultant, accountant or surveyor)
- Marketing and advertising
In addition to this are the ongoing fees, also known as the royalties or management fees that are paid to the franchisor. Often they are a percentage of the franchisee’s turnover and can be more than 15%.
It’s easy to see how these costs can add up, meaning that some potential franchisees need to look further than their savings account to raise the funds.
Thankfully some British banks have specialist franchising units that provide better terms than they would do for traditional start-ups, as Richard Holden from Lloyds Banking Group explains:
“Some banks will finance up to 70% of the investment a franchisee needs to buy into the franchise, sometimes at a better interest rate than normal too. This can include working capital, the licence fee, additional investment for a vehicle or fixtures and fittings, and a reasonable income for the franchisee to take from the business until it is up and running.”
Other sources of finance are also available, such as invoice finance (where you receive a cash advance on your invoices as soon as they are sent to your customer) and asset finance (where you pay for tools and equipment over a set period instead of buying them outright). The costs associated with these options will need working out in detail to make sure they are a cost effective way of setting up your franchise.
As with anyone starting out in business, new franchisees will look for support from those who have done it before to make sure they spend their money wisely. However it can feel difficult to justify the cost of getting an expert involved when there are so many other demands on your finances. So the Government has set up GrowthAccelerator to ease the pressure for startups, including those wanting to become franchisees.
“Employing a coach who has been there and done what you need to do to run a successful franchise can be out of budget” says Nicky Lees from Pera Consulting.
Use the content guide below to answer your franchising questions:
- What are the advantages and disadvantages of franchising?
- Does my business suit the business model?
- What do I need to consider when setting up the franchise?
- What are my options for funding a franchise?
- How do I recruit the right franchisees?
- What are the advantages and disadvantages for the franchisee?
- Will I suit the franchise model?
- Where do I find franchise opportunities?
- How do I choose the right franchise business?
- What questions should I ask before buying?
- How can I finance becoming a franchisee? (You are here)
- How do I make my franchise successful?
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