In the UK alone, there are over 1,000 franchise systems – some recognisable like McDonald’s, and others less so, but still franchises nonetheless. With more than 50,000 individual franchisees, you can tell it’s big business in the UK. Franchises employ approximately 710,000 people and bring in more than £19 billion for the UK economy each year. Joining a franchise sounds like a smart business move if you’re just starting out and want the benefit of a structured, big name, without having to build your own reputation from scratch.
The franchise industry has continued to grow at an exceptional rate over the past couple of decades in the UK, 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 – and usually a huge, respected name in your industry, which automatically attracts attention, too. 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!
Of course, brands don’t just let you operate with their name behind them for the fun of it. There are franchise costs involved and a franchise business must pay an initial investment and ongoing fees to the franchisor in order to carry on as a franchisee beneath them.
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 so you can obtain the right financial backing. Below we’ll discuss all the costs and fees involved so you can make an informed decision as a prospective franchisee to determine if it’s worthwhile for you as a business opportunity.
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.
You’ll pay royalty fees, marketing fees to cover marketing campaigns which benefit you and your specific franchise, and a larger fixed fee initially to start operating as a franchisee. These ongoing royalty fees can be quite large, but they do vary depending on the franchise ownership and their specific structures.
What Are The Initial Franchise Fees To Enter A Franchise Agreement?
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 the franchisee and their staff will receive from the franchisor, as well as expert advice and business guidelines.
Training is necessary, as it’s this initial training that ensures you and your franchise staff all operate in the way the franchise brand would expect. At the end of the day, it’s in your and the brand’s interest to try and operate your franchise in a way that makes it hard for customers to realise your business is a franchise of the franchisor at all.
This fee can cost anywhere between under £10,000 to 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 across the franchise industry. Remember, though, that this is the upfront fee. Other costs will be incurred each year.
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 depending on the specific franchise brand and their total ongoing costs vs upfront payment.
Why Are Initial Fees Necessary?
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, because ultimately franchisees represent their business and could either enhance or damage their hard-earned reputation.
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.
If the upfront fee was lower, there could be countless people who think they want to join a franchise, only for that deal to fall through at the last minute. Higher fees help you show you’re serious about this business opportunity and it protects the franchise brand.
What Are The Ongoing Franchise Costs?
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 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 if you’re not performing well in terms of profit and loss. The service fee may become an unwelcome expense that eats away at your profit before you’ve even calculated it – but you should be aware of these ongoing expenses before you sign any franchise agreement.
A word of caution: be wary of franchise agreements and contracts that allow the franchisor to increase the service fee yearly.
What Does It Cost To Run Your Franchise?
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.
Whilst this might seem irritating and as though the franchisor is controlling the way you do business, a successful franchise brand knows what they’re doing and can help turn your business into a success if you follow their advice and support. That way, everybody wins.
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.
Franchise Fees For Potential Franchisees: Final Thoughts
Only the franchisor can tell you exactly how much it will cost you, both upfront and as ongoing expenses, to become a franchisee for their brand. Hopefully today has been enough to prepare you to expect to pay certain fees as you become a franchisee, so you can enter discussions with a clear plan of what to expect.
Remember to be wary if ongoing fees can be edited on the fly each year by the franchisor, as it may become untenable to continue as a franchisee in this scenario.
Becoming a franchisee can be a lucrative business deal for you. You’ll benefit from operating as an established brand with all the customer loyalty and reputation that comes along with that, making drumming up interest in your new branch easy. But you have to make sure the fees work for you in a practical sense.
Discuss your options with your franchisor, ensure you’re well-informed, and ask the right questions and you might find that a franchise business opportunity is right for you.
