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The idea of owning a franchise can be a compelling prospect for many entrepreneurs. Before signing a franchise agreement, all prospective franchisees must consider the financial side of franchise ownership. Deciding whether a franchise opportunity is affordable is a crucial personal and business decision. Every opportunity is unique, much like every individual’s financial situation. This article will explain potential costs and how prospective franchisees can evaluate their financial positions to determine whether they can buy a franchise.
The Cost of a Franchise Opportunity
The British Franchise Association (BFA) estimate that the average cost of starting a new franchise business is approximately £42,000. But, this is an average. Every opportunity is unique, and new franchises vary significantly in cost. Whether you can afford to invest in a franchise depends on how much money the franchisor requires and your financial capabilities.
There are several costs associated with a franchise opportunity. Franchisors charge new franchisees an initial fee. This investment covers the costs of setting up their new location and pays for further aspects, such as the initial training program and the right to use the franchisor’s branding.
Franchisees will also pay ongoing franchise fees. These include royalties and contributions to the franchisor’s marketing fund. The franchisor will outline the fee structure within the franchise agreement. Read this thoroughly before agreeing to join any business, seeking independent legal, financial and business advice if necessary.
In addition to the franchisor’s fees, you will need sufficient working capital to invest in the business for as long as it takes to become profitable. Working capital can cover aspects such as buying stock and paying operational expenses.
Affordability
Deciding whether to join a franchise is a big decision, primarily due to the associated costs and the legal obligations that stem from signing a franchise agreement.
The following section outlines several steps a prospective franchisee should consider to determine whether you can afford to invest in a business opportunity.
1. Consider Your Assets
First, assess your financial situation carefully. Think about the assets you own. These might include the following:
- your house;
- car; and
- savings.
2. Consider Your Liabilities
The health of your financial situation rests on your assets and your liabilities. So, once you have considered your assets, turn to your liabilities. Think about your debts and financial obligations. For example, have you taken out a loan or a mortgage on your house, or are you paying for your car through a finance arrangement?
With a complete picture of your finances, you can make an informed decision about the affordability of a business opportunity.
If you cannot fully pay the initial franchise fee, further options, such as business loans, may be available.
3. How Much Do You Need?
Next, consider how much money you need to start your business under the franchised brand. You should consider:
- the initial fees;
- ongoing franchise expenses;
- ongoing royalty and marketing fees; and
- working capital.
It is an excellent idea to seek legal advice at this initial stage to ensure you are making a legally sound investment and are complying with legal and regulatory frameworks. If you want this, be sure to factor legal costs into this amount.
4. Research Business Loans
There are many different types of business loans available. Whether a bank or other lender would allow you to take out a loan (and the size of that loan) depends on multiple factors, including your assets, financial history and obligations.
Discover the key legal and commercial issues to consider when buying a franchise.
If you need help with a business loan, you should thoroughly research available loans to buy a franchise. Before opting for a particular loan, understand the payment terms. Ensure you can afford repayment, and remember that you must repay the loan whether the business is successful or not.
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Key Takeaways
Franchise opportunities vary significantly in cost. Before signing a legal agreement, carefully considering the financial side, including your personal situation and the opportunity’s financial forecast, is essential.
This article has explained some key steps prospective franchisees should take to assess whether a franchise opportunity is affordable. These include the following:
- considering your assets;
- assessing your liabilities;
- determining exactly how much you need to start and get the franchise business off the ground; and
- researching business loans, if required.
If you are a prospective franchisee who needs legal advice, LegalVision’s experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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