For many people interested in entering the retail sector, a franchise may seem like a good option. You have the advantage of buying into a well-known brand with established national marketing campaigns, marketing strategies, and business plans.
Investing in a franchise seems like a safe bet for a viable business. These benefits come at a price. For franchisees who are not aware of or don’t understand the extent of the ongoing franchise costs they are agreeing to when they sign up to the franchise, these ongoing costs can get lead to serious financial trouble.
Ongoing Franchise Costs That Can Really Add Up
- Royalty payments: Most franchisors require royalty payments for use of the franchisor’s brand name and intellectual property.
- Marketing costs: Most franchisors will charge regular marketing fees for the benefits the franchisees received from the franchisor’s marketing campaigns.
- Training costs: Most franchisors require their franchisee to attend an initial franchisee training course and to send at least some of their staff on franchise specific training programmes. Some franchisors also require their franchisees to attend quarterly or annual conferences. Usually, you will need to pay for you and your staff to attend these programmes and conferences.
- Product sales margin: If you buy and sell a product line supplied exclusively to the franchise, you are likely to have little or no control over what products you stock, the minimum quantity of stock you must purchase, the price you must pay to purchase the stock, and the retail price you must charge for those products.
- Updates to systems and technology: Generally, all franchisees are required to operate the same systems, software, and other technologies, which means the franchisor will dictate when you need to update systems and software and when you need to upgrade or replace things like your plant and machinery. These upgrades are usually done at your own expense.
- Updates to Fit Out and Fixtures: In order to keep their brand looking fresh, most franchisors require their franchisees to regularly update their fixtures and fittings, which is costly. Depending on the franchisor, you could be committing to refitting your business every two to five years.
- Cost to exit: If you terminate your franchise agreement before the end of the term, you may be required to pay royalty payments to the end of the fixed term, rent to the landlord for all or part of the remaining lease term, and/or early termination fees. When the franchise agreement comes to an end, you will also need to consider the impact of any restraint of trade provisions, which will place restrictions on you for a period of time after you leave the franchise.
Buying into a franchise can be a great business decision. Before you dive in, it’s important to get professional advice. With a professional advisor by your side, you can set your business up for success.
You can find our article Thinking About Buying into a Franchise? on our website. For more general information on franchises, check out What Happens When a Franchise Changes Hands and 10 Things Every Franchise Owner Should Know.