When it comes to business ownership, entrepreneurs generally have three routes they can go down. You can either start up a business alone (which comes with any beginner mistakes), you can buy an existing business for sale (although turnkey, can be very expensive), or you can go down the franchising route. Franchises are often considered a “business in a box” because for an investment – a franchise fee – you get a business package, training and support, and everything you need to launch a business under a proven brand name. But how much do UK franchises cost? Well, there are actually a few costs involved with buying a franchise. Let’s learn more.
Ongoing Versus Initial Fees
A franchise investment is broken down into several fees plus working capital. The main cost will be the initial investment. This will be the biggest cost involved with buying a franchise business and can range anywhere from a few hundred right up to a seven-figure sum. Initial franchise fees – often called the initial investment, grant access to the business model, the franchise trademarks, and access to the franchisor’s partners and suppliers.
Ongoing fees are usually called royalty fees or continuation fees. This royalty fee not only grants continued access to the brand, but fuels marketing and research that benefits the entire franchise network. Whilst some franchisees and those unfamiliar with franchising simply write off franchise royalty fees as the franchisor’s profit, there are a number of reasons why royalty fees are important.
Continued Support –
Royalty fees enable the franchisor to spend money on building the franchise network and continuing the levels of support they can offer franchisees. This could involve regular conferences, meetings, and training.
Powerful Marketing –
Owner-operated, non-franchise businesses cannot afford the likes of TV marketing and newspaper advertising. It can also be difficult to make money to attend shows like The Business Show. Franchisees part of a franchise network contributes to a group marketing fund which is used to pay for these costs and deliver powerful marketing messages that drive business for franchisees.
Recruiting Further Franchisees –
Although the costs of buying a franchise fall on the investor, the costs of recruiting franchisees and growing the franchise network can be staggering. In many cases, it costs £20 per genuinely interested inquiry, and around 100 leads to convert a franchisee. This may not sound like a lot but when you take into consideration the costs of discovery days, legal, consultancy fees, and internal workforce this can add up.
It should be said that the more the franchise network grows, the more the network benefits. The whole is greater than the sum of its parts. All franchisees contribute to building the brand and the whole has in return, a positive effect back on the franchisees.
Remember to Set Aside Working Capital
If you invest in a management franchise, where are you going to get the money to pay for staff wages? Who is going to fund the cleaning products and equipment if you invest in a cleaning business? If you invest in an internet-based business, who pays for your PPC and marketing? This all comes from what is called working capital. Working capital is a figure you set aside when becoming a franchisee to see your business through until the point where you make money and break even. As a rule of thumb, working capital should be similar to that of the initial investment. For example, if you invested £40,000 in a management cleaning franchise, you’d set aside £40,000 to see your business through to getting an ROI, in the meantime using this fund to pay cleaner’s wages for example.
While some businesses are cash positive from day one it is always good to set aside a safety net of money in case marketing needs a boost at any time.
Putting a Price on Business Ownership
Franchising is not out of reach for most people. Many franchises can be purchased and run for less than £10,000. Cleaning franchises generally won’t cost more than 50K, and there are many banks and businesses which favor franchising, in that they can lend up to 70% of the franchise investment. Paid back over several years, and thanks to the 93% profitability rate of franchisees, this is a sector attracting thousands of new franchisees every year.
Higher-end franchises like fast food come with greater investment and royalty costs, but usually, the demand means that the break-even time is similar to that of a more affordable franchise. Over the years, franchises have demonstrated resilience during times of recession, and many franchises have shown to be recession-proof businesses. During the COVID pandemic, plenty of franchisors went out of their way to adapt to the changes in working, including reductions on royalty fees and fixed percentage fees.
Many owner-operated franchises can be invested in for less than £35,000. From van-based businesses to work-from-home, franchises are more affordable than you’d think.
If you’re looking to get into business for yourself but not by yourself, franchising is a great way to do just that. Cleaning businesses are lucrative, some being management type franchises where you manage a workforce rather than doing any hands-on work yourself. Food franchises are diversifying and over the years have shown to be resilient thanks to the now greater dependency on delivery networks, and thanks to the wide range of funding options out there, now have never been a better time to become a part of this growing sector.
Discover franchising as your next big career step. With over 1,000 active franchises in the UK, there is something for everyone.