How Much Does It Cost to Buy A Franchise?

Buying a franchise can be a fantastic way to own your own business. When you buy a franchise, you buy the right to use an already established brand; as well as all of the systems and processes that you will need to operate that business on a day to day basis. You’ll also receive training and support from the franchisor, who will teach you everything that you need to know to run the business successfully. The obvious question then is, “how much does all this cost?”

Initial Licence Fee

Typically, franchisees will be expected to pay an initial licence fee when they first buy the franchise. The initial licence fee should cover the costs to the franchisor of providing the training, stock and equipment that make up the start-up package. The licence fee should not include any significant profit element for the franchisor. This is because if the franchisor makes most of his profit from the licence fee, he will have a strong incentive to simply sell new franchises rather than supporting his existing franchise network.

In a well-run and ethical franchise network, the franchisor will make a profit from the on going fees charged to the franchisee. In this way, the franchisor has a direct interest in the success of his franchisees – the more the franchisee makes, the more the franchisor will make. The franchisor should not need to make a profit on the licence fee.

On-going Charges

After the initial fee, the franchisee will be expected to pay a regular charge for the continued rights to use the business system and support of the franchisor. These fees will usually be a service charge, calculated as a proportion of the franchisee’s turnover and payable every month. This could be anything up to 10 – 12 % of the franchisee’s turnover. This means that for a franchise network to be successful there must be enough profit margin for both the franchisee and the franchisor to be able to take a cut and yet still be able to offer competitive products and services to customers.

In some networks, the franchisor will make money from the sale of products to the franchisee instead of charging a proportion of turnover. This is particularly common in food retail franchises where the franchisor charges a mark-up on the cost of menu items supplied to the franchisee.

There is an increasing trend for franchisors to make the service charge subject to a minimum fee. In a pure franchise model, the franchisee’s charges would not be subject to any minimum. This is because if the franchisee is obliged to pay a minimum fee, then the franchisor is guaranteed to get paid, even if the franchisee fails to make any money at all. This goes against the general principle that franchisee and franchisor are in it together; and that the franchisor’s success should depend on the success of his franchisees.

Other fees

Franchisors will often make charges for additional services provided to the franchise network and it is important for the franchisee to understand what additional payments they may be required to make. For example, many franchise networks require franchisees to make a contribution towards a national advertising budget. This could be up to a further 2% of the franchisee’s turnover.

Franchisees will be required to attend regular training and events arranged by the franchisor. Whilst some franchise networks do not make a charge for the training or event itself, the franchisee would be expected to pay for his own travel and living expenses. This could mean that the franchisee must budget for hotel accommodation and meals, as well as the costs of travelling to and from the event.

Further fees may arise in particular circumstances. For example, one -off charges may arise at renewal, or if the franchisee chooses to sell his business.

Counting the Costs

All of these fees and charges will be on top of the costs of buying stock and raw materials that any business needs. This means that the running costs of a franchise business will be higher than for a stand-alone business. Having said this, many franchisors are able to leverage the buying power of the network as a whole to negotiate better terms with suppliers than an independent business could. This may go part way to off-setting some of the costs; although it is not uncommon for the franchisor to retain the benefit of supplier rebates or discounts rather than passing these on to their network.

The crucial take away for franchisees is that before investing in any franchise business, you must ensure you are aware of all the fees that you will be expected to pay; and you must budget for all of these when preparing your business plans. You will need to identify any hidden costs and assess whether over all, the franchise network offers good value for money.

If you are a franchisor, the lesson is to be transparent in the fees that you charge. There is nothing inherently wrong with making money from a franchise network. Indeed, a franchisor must ensure that his fees are high enough to fund the support, training and other services he must provide to his network. However, it should be clear from the outset what is included in the standard fees and when extra charges may be levied. Similarly, if the franchisor is receiving benefits from suppliers, these should be declared to the network.

Ultimately, as with any business, the numbers must add up. This applies to both franchisee and franchisor, both of whom need to be able to make a reasonable profit from the business. If either party is benefiting at the expense of the other, the business model will not be sustainable in the long term.

You Want To Buy A Franchise – Really?

Statistically, the vast majority of people who actually start their own franchise business don’t truly understand what they’re venturing into, and so they often fail. Many even view it as fascinating and alluring, believing that freedom and wealth are right around the corner. It’s probably one of the biggest financial decisions you’ll ever make, so it’s crucial to understand exactly what being a franchisee really means.

What does the term “self-employed” mean to you, anyway? It’s extremely important to ask yourself that question. Call it what it is. In actuality, you’re replacing your J O B with a franchise business, you’re new J O B. Many successful entrepreneurs long for the day when their franchise business reaches the level of success that ultimately provides absolute control of their time and income. Now, that’s what it’s all about, right? Yes, most business owners are “control freaks” at some level. But that is a necessary ingredient of a successful franchise owner.

In many ways, being a business owner is strikingly similar to being an employee. In actuality, you’re still trading hours for dollars; the major difference being that as a franchise business owner, you generate income for yourself rather than earn money by punching a clock in a traditional job. And you have the huge advantage of plugging into a tried and proven successful system.

Regardless of your reason, the decision to buy a franchise is a very calculated risk. Even considering any economic challenges, the growth of franchising continues to be strong, and a great option for those who want to operate their own business. Franchising provides motivated, new business owners the best possibility of succeeding with the least amount of risk. Industry experience is typically not required to operate a franchise.

Granted, certain risks do exist in franchising, as in any business, but there are many franchise concepts that are recession proof and some actually thrive in a weaker economy.

Your ultimate goal as a franchise owner should be to gradually replace the hourly wage scenario with more of a long-term passive income. Many franchises provide for the ability to hire a manager once your business s generating a decent profit, allowing you to gradually move away from the day to day, hands-on operations. That way, you create and maintain a healthy balance of a successful, passionate career along with having the time and money to enjoy a fulfilling lifestyle with family and friends. The best of both worlds.

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Why Become A Franchisor When You Can Buy Into A Master Franchise Agreement?

In early retirement, I do a little bit of consulting in the franchising sector. You see, I built up a perfect business model of my small business and after a decade felt it was ready to franchise. In doing so, I learned a lot, and I learned most of it the hard way. Suffice it to say the franchising industry is pretty difficult, over-regulated, and as a franchisor you are much more apt to go out of business than if you were to buy a franchise. Likewise, you’d be better off to buy a master franchise of a franchising system with a proven track record than to try to perfect a business model and then attempt to franchise it.

Often when master franchise buyers came to me about securing a master licensing agreement, they were particularly concerned about costs. They were also more rightfully concerned with revenue split – that is to say; how much of each franchise fee could they keep for every unit sold and how did we intend to split the royalty income stream – likewise in our case; percentage of soap sales and equipment sales (Mobile Car Wash Franchise Business).

Now then, let me tell you that as a franchisor it was hard to want to give up any of that, but alas, as my franchising company grew I realized just how hard it was to maintain a rocket ship growth and still fulfill all my duties as a franchisor.

Recently, there was an interesting piece in Global Franchise News titled; “14 Questions a Master Franchisee MUST Ask,” published in December 2016 issue.

The article stated; “Before signing that master franchise agreement, be certain that you can answer these essential questions, says Adam G. Wasch,” and the first item discussed was; How much will a master franchise agreement cost me? And the article explained: “This is the million-dollar question. The typical initial fee for a master franchise agreement will be significant, but it should also be commensurate with the brand awareness of the brand in, and the size of, the specified territory. You can expect to pay multiple six-figures for the rights to become a master franchisee.”

In our master franchise agreement we did a 1/3 – 2/3 split of the initial franchise fee for each new unit sold, we kept the 23rds portion, but also did the training. Later with larger well-financed master franchisee buyers we did a half-half split, but they had to do the training of the new franchisees themselves. On the royalty side we did the 50/50 split from the beginning.

Trust me when I tell you, I’d have rather purchased a few master franchise territories of someone else’s franchising system, than have to do the whole thing from seed to weed all over again – Just Saying.