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Franchise fees explained for potential franchisees

Franchise fees explained for potential franchisees
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In the UK alone, there are around 1,000 franchise systems, with more than 22,000 individual franchisees. Franchises employ approximately 710,000 people and bring in more than £15 billion for the UK economy each year.

Despite Brexit and the recent recession, the franchise industry has continued to grow at an exceptional rate over the past ten years, with 97% of franchises proving to be successful. Owning a franchise provides you with the opportunity of being a business owner with a tried and tested business model behind you. A franchise agreement lays out all of the guidelines to follow, and you’ll already have a loyal customer base, so a lot of the groundwork is already done for you!

If you are interested in purchasing a franchise, it is important that you understand the fee structure so that you know what you’re getting yourself into and so that you can obtain the right financial backing.

What are typical franchise fees?

It is hard to put an exact figure on typical franchise fees as they differ greatly from franchise to franchise. But potential franchisees can expect to pay an initial fee, as well as some sort of monthly or yearly fee to cover royalties etc.

What is the franchise fee paid by the franchisee when the franchise is accepted

Once the franchisee’s application has been accepted, and the franchise agreement has been signed, the franchisee will need to pay the initial franchise fee, which gives them the right to use the company’s brand name, logo etc. This fee usually also covers the training that franchisee and their staff will receive from the franchisor, as well as expert advice and business guidelines.

This fee can cost anywhere between under £10,000 and over £5 million, so the gap is really quite large and will be dependent on the franchise company’s success and notability. That being said, the British Franchise Association speculates that the average initial franchise fee is around  £40,000.

As a ‘rule of thumb’, the initial franchise fee is around 5 to 10 per cent of the total investment, but this isn’t always the case, and it can end up being much more.

Why should a franchisor charge an initial franchise fee to the potential franchisee

The franchisor has most likely worked long and hard to bring their business to where it is today. That is why they are very careful about who they accept as franchisees.

The franchise fee covers the intellectual property cost, including logo, trademark, brand name and business plan, that the franchisor is going to share with you in the franchise agreement. This fee is also set to cover the costs of training the franchisee and their team and provide them with expert insights into their business realm.

While some initial franchise fees may seem like a massive upfront expense, you need to remember that you’ll be receiving a tried and tested business model that most likely has a large customer base that is excited about your branch’s opening. Customers know what to expect, so they are more likely to support a franchise than a brand new business. You’ll also be receiving ongoing support from the franchisor.

As there are only a limited number of franchise opportunities per territory, the initial franchise fee is there to ensure that potential franchisees are serious about being a part of the franchise and representing the brand.

How is the service fee structured

Franchisees are usually expected to pay a weekly, monthly or yearly continuing fee to the franchisor. This fee structure will differ between franchises, but it can be a standard, set fee, or a percentage of sales. Some franchisors ask for as much as 20% of sales, but the average is probably around 7%.

A service fee ensures that the franchisor maintains an interest in you and your franchise, but the fact that service fees are often a percentage of the sales and not the profit could have a negative impact on the franchisee. The service fee may become an unwelcome expense that eats away at your profit before you’ve even calculated it.

A word of caution: be wary of franchise agreements and contracts that allow the franchisor to increase the service fee yearly.

What are other expenses you can expect as a franchisee

It may seem obvious, but as a franchisee, you will be responsible for all of the usual business expenses such as:

  • Rent
  • Employee wages/ salaries
  • Insurance
  • Tax
  • Stock
  • Utilities
  • Interest on any business loans

The franchisor is not responsible for any of your day-to-day business expenses. You may also have unexpected expenses thrust upon you by the franchisor, such as new uniforms to comply with franchise consistency etc. You may also be required to make minimum stock purchases and other required expenses that you would have more control over if you were running your own business.

Is it easy to obtain financial backing for purchasing a franchise

If you do not have the upfront amount for the initial franchise and start-up fees, you may need to look at getting financial backing from a bank or other money lender. Getting financial backing for buying a franchise is often a lot easier than if you were trying to get a loan to start your own business. This is because franchises have tried and tested business plans and a loyal customer base and are often seen as less likely to fail than a brand new business that is still establishing itself.

As long as you have a clean financial track record, you should not have much of an issue obtaining the financing you need to purchase a franchise. You may need investment funding for shop fitting, rent, equipment, and working capital on top of the initial franchise fee. Before you start looking for finance for the franchise you intend on purchasing, ensure that you have a realistic estimate of the total investment that will be required to get your franchise up and running.

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