How much does a franchise cost?

Most Franchisors charge a Licence Fee. Essentially this fee is for ‘joining the club’. It covers the legal costs of the Franchisor and for the experience the Franchisor has gained over the period of time in business. It also gives you the legal right to use the Brand Name of the franchise for the term of the Franchise Agreement.

The Licence Fee also usually covers the cost/time of researching the area to ensure that the territory issued is demographically suitable for the type of business. Last but not least the costs of developing a franchise from an existing business is not inconsiderable and a small part of the Licence Fee is often sort to recover some of those costs.

Architects are sometimes required to ‘fit out’ premises within the Franchisors scheme and are sometimes either included within the Licence Fee but more often are charged as an additional invest costs. The Franchisor will almost always select the architect you will use as they should already have a very good idea of how the retail outlet should look.

Reputable Franchisors will charge a Training Fee to cover the costs of the initial training program, often referred to The Induction Course. The duration of the course will vary greatly from franchise to franchise and therefore the cost will also vary considerably. It does not, however, usually cover the cost of Hotel or Bed & Breakfast Accommodation whilst attending the course nor any of the associated costs.

The Launch Program of your new business is one of the crucial elements of starting any new business and is often included in the up-front costs of investing in a franchise by ethical Franchisors. The Franchisor will plan almost all the activity of the Launch Program but will on occasion seek assistance from the local franchisee in an effort to maximise the impact and success of the Launch Program.

Does the Franchisor sell you equipment and/or a vehicle and make a profit or do they negotiate a good discount and pass that all on to you as a franchisee? This is an area where you can spot the difference between an ethical Franchisor and others! An ethical Franchisor will pass the majority, if not all, the discount negotiated, whereas others look to make a healthy profit from their negotiations. Central Purchasing departments do have a cost and most Franchisors look to cover those costs from their negotiations. Ethical Franchisors will pass the majority of their negotiated discounts onto their Franchisees! ‘Franchisee should not be able to buy cheaper’ should be the main criteria in any purchasing managers negotiating strategy.

Working Capital is also sometimes included in the set-up costs by some Franchisors. Other simply provide an example of what may be required. Before handing over your money investigate how the franchisor has calculated the amount of Working Capital requirements as your personal requirements may differ from those the Franchisor has indicated.

The advice is investigate exactly what you are getting for your investment. There really is no right or wrong answer to any of the above breakdown of the Up-Front Fees. You should, however, be aware of exactly what you are paying for. No ethical Franchisor will be shocked by your interrogation of their initial costs; indeed, they expect it. The vital thing is you understand where your investment is going, if for no other reason you will need the information when completing your books!