How can you properly assess the upfront investment of a franchise?
The initial cost of one franchise can vary greatly from the next. How do you assess the cost properly? What should you look out for? What questions should you ask the franchisor with regards to upfront costs?
The upfront investment will vary according to the type of franchise, the location, the floorspace and the equipment required. It can also be tricky to identify what is included in the ‘starting from’ cost and it is well worth your time to ask the right questions and do your own research.
Here is a breakdown of the most common upfront costs:
Initial franchise fee
The franchise fee is typically a one-time entry fee giving you access to the franchise brand for the term of your agreement. It will also usually provide you with launch assistance as well as ongoing support and training. This fee will be influenced by how well established the brand is and how many inclusions there are.
Fit out fees
If a physical setting for the business is required, you will encounter upfront fit out fees. Franchise companies typically have brand guidelines when it comes to construction to ensure brand consistency across all locations.
These fit-out costs will vary depending on several factors and will typically include furniture, equipment, signage and other professional fees, like architects and builders.
It is worth checking who is responsible for the building contract, project management of the build and items such as council approvals.
Launch costs
The launch costs are the inevitable costs of starting a business, whether it is a franchise or a new start-up. They include recruitment, systems setup, licenses, initial marketing campaigns, training and legal and financial fees. Some of these may be included in the initial franchise fee.
The benefit of getting a business started with a franchisor is that they have launched new businesses many times before, which means they should be able to provide you with plenty of background info and modelling about upfront costs to assist you with your assessment.
This is valuable information you don’t have access to when starting a new business from scratch.
10 questions on upfront costs
Here are crucial questions you should ask the franchisor:
- What’s included in the initial franchise fee?
- What is the average cost to fit out a similar sized site?
- Are there any other launch costs or certifications/registrations I should factor in?
- Can I speak to some existing franchisees? Ask for a range of franchisees such as older, newest and a site close by your preferred location. A wider range will give you a better example of how the franchisor works with their franchisees and you can ask them about the various costs they encountered at the start.
- Are there finance packages available? If so, what is the interest rate and how do you qualify?
- What is a typical lease deposit? Also, is it usually a personal security over the lease or is a bank deposit required (ie. more money upfront but less personal risk)?
- Is there a property search fee?
- Does all the equipment need to be purchased through franchisor suppliers? If so, what rates are provided – is it better or worse than purchasing solo?
- When are different fees payable? For example, it is a partial payment of the franchise fee and the remainder once a property is found?
- What is the typical timeframe it takes for a franchisee to pay off their investment and start making a return? What is the quickest and longest time this has taken?
Getting a clear picture of the initial set-up costs is an important part of assessing a franchise opportunity as it’s a key component of calculating expected return on investment. Do your homework – it’s well worth it!
This story first appeared on our sister publication Inside Franchise Business
