Funding the franchise
June 14, 2007
Funding the Franchise
The franchisee should budget for the following costs:
1.The initial franchise fee
This fee will depend on the structure of the franchise package. In its simplest form, the initial fee includes services to assist with start-up, initial training and the purchase of the franchisor's "goodwill" along with the right to use the brand name. In more complex franchise arrangements, the franchisor may acquire and fully equip the premises and, upon completion of the franchisee's training, hand over the "key" to the franchisee. This is called a turnkey operation and the initial fee is based on the cost of the elements included in the package, including training, plus a mark-up for the franchisor.
The franchisee must also fund the fit-out of the business in accordance with the specifications of the franchise package. For some franchises, this may entail little more than the purchase or lease of a van or truck and some small items of equipment. In some of the large retail franchises, however, the securing and refurbishment of premises and fit-out can represent a sizeable cost for the franchisee.
A franchise business is no different from any other in that the franchisee will have to fund the initial start-up expenses until revenue accumulates. The franchisee will, however, benefit from the learning experience of the franchisor and the other franchisees, and will thus have a more accurate picture of working capital requirements. In addition, the recognized brand name of many franchise systems often results in faster customer acceptance of the product or service in question.
The management services fee (MSF) charged to franchisees by the franchisor provides the latter with his or her income. (A franchisor must always remember that these fees are based on turnover, not profit).
A franchisor may also require a franchisee to make a contribution to a marketing or advertising levy which funds the cost of national marketing and advertising for the network.
Any prospective franchisee should carefully assess all of the above costs and on-going fees when evaluating a franchise to ensure that he or she will receive an adequate financial return from the franchise system in question.