According to the British Franchise Association, franchising in the UK contributes a whopping £17.2bn to the UK economy, and as more franchise units open up year after year the sector is booming. Franchising is a great way to get into business for yourself but not by yourself. Investing in a franchise means you’re purchasing the rights to trade as a particular business model in your own area, under the trademarks and system of operation of an established brand.
But how much do franchises cost in the UK? The answer is more complicated than meets the eye. You’ve got your ongoing fees in addition to the initial investment, plus any additional costs associated with legal expenses. Not all franchise fees are tax deductible and you’ll need to speak to a professional lawyer or consultant before investing. Let’s go over the differences between the types of franchise fees.
Initial and Ongoing Fees
Becoming a franchisee means you’ll be trading as part of a proven brand. You’ll be joining a successful franchise network with franchisees across the country or the world. However, to get access to the brand, the business model, and the franchisor’s partners and suppliers, you need to sign an NDA, put down a deposit, and pay the initial investment.
The deposit will vary depending on the franchise and may be up to you however the initial investment will in many cases be the largest of the fees. The initial franchisee in business covers access to the brand, as well as anything you might need to get trading. That does include training and support, meaning you won’t necessarily need any past experience owning a business.
The main ongoing fee you’ll pay as a franchisee is a franchise royalty fee. The royalty fee covers continued access to the brand but are more than just profit for the franchisor. The franchise royalty fee – also called a service fee – covers many things, such as:
Research and Development –
Royalty fees in franchising cover continued research into the market so that franchisees are able to stay ahead of competitors and keep up with demand
National Marketing Campaigns –
Franchisees contribute to a group marketing fund which can be used to run powerful marketing campaigns, delivering messages smaller, non-franchise businesses simply can’t afford. Campaigns such as TV advertising and newspaper ads.
Funding Recruitment –
The main reason and benefit of franchising for the franchisor is increased brand awareness, growing the brand outwards, reaching more customers, and boosting the reputation of the franchise network as a whole. The more franchisees the network has the more reach and power the brand has. Yes, the franchise investment cost falls upon the investor, but franchisors will spend thousands to actually recruit franchisees.
Putting a Price on Business Ownership
As explained earlier, the initial franchise fee is the biggest of the costs associated with buying a franchise. Depending on the type of franchise this figure can range from less than five figures all the way up to seven. High-end franchises and big-name food franchises can cost anywhere from a quarter of a million investment right up to seven figures. Although access to the brand name is one cost, store fitting and launch marketing for big-name brands such as McDonald’s can rack up investment costs. However although investment costs can be staggering, many big-name brands will only recruit high-worth individuals or companies as franchisees and with such big names as that mentioned, a return on investment shouldn’t be far down the line anyway.
At the lower end of the scale, vending franchises are one of the best entry points into franchising. Scalable, vending franchises enable franchisees to get into business ownership and take on clients at their own will. Because of low costs, vending franchises are a great entry point into business ownership.
Vending franchises can usually be invested in from less than 5k. Thanks to the scalable nature of the business model, vending businesses enable franchisees to take on more clients by purchasing and leasing out more machines. As the number of machines grows, or the number of confectionery boxes distributed grows, so does the cost to the franchisee but so does the turnover. Because vending is straightforward, it is a good entry point for anyone looking to get into business ownership.
Another example of a scalable type of franchise is one that can be run on a management basis. In terms of costs, these too will vary. Cleaning franchises are a good example of management-type operation and will cost anywhere up to £50,000 total investment. The management nature of the business means the more cleaners (and clients) the business takes on, the higher the ongoing overheads. Management type franchises utilise a workforce, rather than the franchisee doing the hands-on work themselves.
Overheads and Working Capital
With any type of business venture, it’s a good idea to set aside some working capital, even if the business is cash positive from day one. Working capital – money set aside to keep the business running until breakeven, should ideally be in the region of that of the initial investment. For example, if you’re investing in a management cleaning franchise, the investment being £40,000, your working capital should ideally be £40,000.
Working capital in a management-type franchise operation will be spent on ongoing costs such as staff recruitment, wages, and your own local marketing. The more the investment, the more your working capital should be because the longer it’ll take to break even and get a return on your investment.
Support for Investing in a Franchise
The British Franchise Association works with many banks and lenders who can lend up to 70% of the franchise investment, subject to good financial history and a business plan. Banks favor franchising as a more successful route to business ownership and many of these financial businesses are a member of the bfa. The bfa report around 93% of franchisees claim profitability and this figure is much higher than those that go down the “do it yourself” route.
Could franchising be your next business venture? There are over 1,000 franchises in the UK alone. Take time to explore and find a business you’ll love.