Buy a franchise

When calculating the likely cost of a franchise, you need to take both initial start-up costs and ongoing fees, usually linked to the income or profits of the franchise, into account.

Initial costs of a franchise

The franchisor - the business that sells you the franchise - usually charges an up-front initial fee. If the franchisor relies mainly on taking a percentage of your sales revenue, rather than on a high initial fee, it is usually a good indication that they have confidence in the value of their product or service.

Your largest initial costs are usually your investment in:

• premises
• equipment
• initial stock

You will need to establish a business entity or structure. Although a franchisee holds a contractual agreement with the franchisor, each franchisee is an independent business - and it is this business entity that will enter into the franchise agreement. Your chosen business structure could be a limited company, partnership or sole trader - each of which will involve different costs - or your franchisor might have specific requirements. See legal structures for businesses - an overview.

Ongoing costs of a franchise

There are a number of ongoing costs including:

• You usually pay a percentage of the sales revenue to the franchisor by way of a management service fee. Alternatively, you may pay a fixed management fee of some kind.
• Under the terms of the franchise agreement, you may have to buy stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their buying power.
• You also have to pay the usual business costs - for example, rent for premises, utility bills or the costs of any employees you take on. Again, check if the things that you pay for through the franchisor have a realistic cost.
• Check too if the agreement includes additional charges. For example, you may be required to pay for training, or to contribute to the cost of national advertising campaigns.

Financial returns

You should look into actual returns existing franchisees are achieving. You also need to be aware that the earliest franchises may have cornered the easiest or most profitable markets.

You could also try to work out what financial returns are projected for new franchises, for example, projections of very high profits from a small investment will probably be unrealistic.