What are the costs involved with franchising?

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You’ve got your business up and running and now it’s time to be the next McDonalds. There are a few must haves before your dream of global dominance can take shape. The most important part is that you have an already profitable business. Pay particular attention to that word “already”. If your business isn’t already profitable then in 99% of cases you are not ready to franchise it. This is mainly because a franchisee replicating your business will have additional costs in the form of a royalty to pay and also likely some geographical restrictions on where they can trade.

In many ways franchisors and franchisees are in the same boat and there is the same level of importance attached to funding things properly. The franchisor has a lot of work to do at the outset to ensure legal, moral and operational compliance. The franchisee likewise, but their role is about locally operating the franchise system that the franchisor has created. Let’s look at both parties in a little more detail.

From a franchisors perspective

Setting up the franchise system

There are three distinct phases for a new franchisor. Firstly, designing the entire franchise system which takes several months. This is where the big decisions lay and where most business owners need a franchise consultant. Protecting the intellectual property at the outset can cost several hundred pounds. A series of mission critical decisions are made on a plethora of elements ranging from the level of franchise fees to territorial rights and how to generally position the opportunity against what are likely to be experienced franchise competitors. Getting a brand ready to become a franchisor often takes at least two months. The exact cost depends upon how much you or your team can create internally and of course if you or your team have the experience to make the decisions required. Because of this the cost to outsource the majority of the creation the franchise system typically ranges from £7,500 to £12,500 excluding legals which on their own can amount to £4,000.

Recruiting the franchisees

When the franchise system is created it’s time to recruit the franchisees and unless you are able to identify where the likely franchisees are located then, in most cases, a budget needs to be expended to find franchise partners. That can range from a few thousand pounds up to tens of thousands of pounds depending on the level and type of marketing. Many online franchise directories exist and there are several franchise exhibitions that run each year where potential franchisees might find a suitable franchise.

You can choose to hire a Recruitment Manager, but you may have someone suitable in house already or as an owner of a business you may opt to deal with the enquiries yourself. Having someone to manage the recruitment process is essential and that person can be salaried or the whole process can be outsourced.

Managing the network

Finally as franchisees are recruited they need training, supporting and managing. This is likely to be done by a member of your team or in the case of smaller companies potentially by the owners directly. Just like a new member of staff in a senior role franchise owners need, and expect, regular contact and dialogue.

From a franchisees perspective

Across all price points and sectors the average franchise fee is around £14,000 and the average total investment including retail formats is likely around £45,000.

If you were a café you might buy into a franchise system that has an initial franchise fee of £10,000, but the total investment to get the doors open might include refurbishing the property, installing all the fit out elements like a counter and seating, maybe a kitchen and external signage etc. All businesses also need some working capital to pay for the running expenses until such time as the business is up and running. So in this example the franchise fee may be £10,000, but the total investment might be £100,000+. Other systems that don’t need the capital investment can cost less than £10,000 all in.

Once setup a franchisee has some specific franchise costs to consider including paying a royalty which may be a % of net vat sales each month. Other costs include a contribution to national marketing and potentially shared costs for software with other franchisees in the network. So franchisees pay for the rights throughout the term of their franchise agreement.

It’s still a business just like any other, which means you will have the usual costs of small business ownership however because you are guided by the franchisor and the franchisors staff you have a team working with you and sometimes for you to some extent and this is a key reason why all the available evidence shows that franchises are more successful than going it alone.