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Funding your franchise

Make sure you factor in all your costs when investing in a franchise

Franchising

When buying a franchise, doing your sums first could pay dividends later

From entry-level franchises at £5,000 to the more serious business opportunities at up to £3m, the range of investment potential in the franchising industry is almost open ended.

The business premise is largely the same but the level at which you buy will vary on the finances you have available, the finances you can borrow and the ability to balance your cashflow.

The cost of franchise businesses is generally spread across a lower level tier of between £5,000 and £20,000 and a higher tier between £120,000 and £200,000. The top of the triangle is reserved for regional clusters and franchises with a large capital outlay, such as hotels.

The total investment comprises the initial franchise fee, which covers the rights to the brand and the cost to recruit and train franchise owners, as well as the working capital.

The diverse nature of franchising means a reliable average fee cannot be calculated so how do you know you?re getting good value for money?

?It sounds trite but it?s common sense,? explains Dan Archer, head of marketing at the British Franchise Association. ?You might be asked to pay £10,000 for the rights to use a brand that?s been going for six months while an established company that?s been going for four years might only be charging £15,000.?

Also check the fees for the training on offer. If you are parting with £5,000 then a five day residential course will offer far greater value than a single day?s training.

Further to the initial fee, ongoing charges are paid to the franchisor as either a percentage of turnover, a levy on the sale of goods, a flat fee or a combination. The percentage can be between five and fifteen percent of turnover, with 8.3% cited as the average by the BFA.

Archer argues that franchisees should understand that the fee symbolises the continued commitment between the two parties. ?If you can?t see the value in month one then you?re going to begrudge paying 10% of quite a bit when you?re really moving,? he says.

Thorough research, both in tandem with and independent from the franchisor, will help clarify. The projected total investment should be balanced with the experiences of existing franchisees. Get access to trading summaries where possibl..

Archer advises: ?Take into account that you?re told the figures by the franchisor but you can talk with existing franchisees. Then be hard on yourself. If you will only doing 75% of the projected turnover, does the business still function??

Banks, particularly franchise specialists, can look favourably on people taking on a franchise rather than starting up their own business, lending up to 70% rather than 50%. Your may also be able to secure flexibility over repayments, such as payment holidays and free banking periods.

Alan Smart, National Franchise Manager for the Royal Bank of Scotland, says: ?Cash is king. Make sure you factor in working capital needs and not just central costs or set up costs. If cash isn?t coming until month two or at the right level until month four then how are you going to pay the bills or pay the wages??

Becoming a Franchisee

The challenges and benefits of becoming a franchisee will be highlighted at the British Franchise Exhibition in a special presentation.

Fastway Couriers franchisee for Greater Manchester, James Headifen, will present a seminar titled: ?How becoming my own boss made my work into my passion? on Friday 26th January at 14.30.

In 2006 Headifen decided he wanted to work for himself and become a franchisee in October last year. Since then he has accumulated 200 customers and 17 vans operating out of the depot.

He comments: ?To be able to work for yourself is the most important thing - it makes what used to be a job into a passion!?

Funding your franchise

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