Money Matters

Franchising can be a great way to get into business for yourself, but if you’ve never been self-employed before then it’s important to be aware of the realities of owning your own business. That’s especially the case when it comes to financial matters. Here are 10 areas where newcomers often don’t know what to expect.

1. Set-up costs – what’s included and what’s not?

Franchises come in many different types and sizes; you can buy a franchise for as little as $5,000 or more than $1,000,000. But however much you’re planning to spend, you need to know what is included and what is not before you sign the contract. When considering set-up costs, some of the common areas to investigate are:

What does the franchise fee cover? Normally, it will cover the right to use the brand and systems – but what else is included? A launch promotion and initial marketing? Manuals? Training? Who pays for the travel and accommodation costs?  Do you get paid while you are training, or do you have to allow for this when planning your budget? Is there a work guarantee or an income guarantee? When do they apply and for how long?

Set-up costs will vary considerably depending on the type of franchise you have chosen: for example, home-based, mobile or premises-based? Do you have to provide a rental bond? Are there any fit-out costs? Is the fit-out on a fixed price contract or just an estimate? Is external signage included? Do you require a vehicle? What type? Must it be new or second hand? Is signwriting included or additional? What equipment or initial stock costs will be incurred? Can items be leased to preserve initial capital?

Any good franchisor will detail all the above prior to signing so that you don’t find yourself faced with unexpected costs. Each franchisor may include different elements in their promotional material, so it’s important for you to know whether or not such costs are included in the figure initially quoted to you.

One question often overlooked is: have adequate provisions been made for professional costs – your lawyer’s and accountant’s advice? Who pays the franchisor’s legal costs? Are the costs of leasing negotiations allowed for?

Don’t make assumptions on any of these areas: be specific with your questions and your research. There’s a helpful list here of 250 Questions To Ask Your Franchisor.

2. Ongoing fees – how much, what for and when?

All franchise systems require their franchisees to pay ongoing fees in some way. These fees are the life blood of the franchise system; they fund various services from the franchisor such as support, analysis and development, and also provide the franchisor with the return on their own investment.

Ongoing fees, sometimes called royalties, management fees or licence fees, are separate to and additional to the upfront franchise fee you paid at the beginning. One question we are often asked is, ‘Can I negotiate the fees downwards?’ The answer is...

This article appears in full on page 46 of Franchise New Zealand magazine (Year 31 Issue 1). You can read the entire article in the digital magazine or, if you live in New Zealand please send for your free print copy.