Analysing The Costs Involved In Starting A Successful Franchise Business

So, you’ve decided to strike out on your own and invest in your own business. Depending on your personality, investing in a franchise can be a wise choice, as it means you don’t need to launch a business model from scratch. Plus, franchising mitigates some of the risks that standalone entrepreneurs face.

At Nedbank we take money seriously, and partner only with reputable franchisors founded on strong operating models, principals, values and integrity. We also understand that a franchisee comes in many forms, ranging from an established company looking to diversify its portfolio, to an individual that has been laid off and is putting all their savings into a franchise.

Part of our job is breaking down the options for investors when it comes to franchising investment costs, and we share some of this expertise in this article.

Countdown 

The first costs you need to plan for are those you’ll spend researching franchises to invest in. The cost of legal professionals for drawing up contracts needs to be factored in, and if you enlist the help of an external party, such as fund managers or franchise consultants, you will need to set aside money to pay them for their services.

The franchise fee is the fee payable to the franchisor to have the rights to use their name, logo, business model, etc. It also helps compensate the franchisor for any continued support they provide your franchise. There is an initial franchise fee payable, as well as ongoing fees that must be factored into operating costs: these are the fees that franchisors waived during the periods of restricted trade caused by the Covid-19 lockdowns to help their franchisees with cashflow.

Another fee that the franchisor commonly charges is a marketing fee. As the name indicates, this money contributes to the ongoing marketing that the franchisor does to build the brand. In many instances this was also waived during restricted trade periods, despite many franchisors taking a more aggressive approach to marketing, especially with regard  to their digital and online presence.

Lift off

Once that’s taken care of, it’s time to start considering the logistical costs associated with getting the franchise off the ground. These costs relate to the property that you will be operating from, such as property purchase costs, rental deposits and/or the costs to renovate the building according to your needs.

In certain instances, the franchisor helps with the respective licensing costs. It’s important to pay close attention to the exact terms of your franchise agreement, as it dictates what assistance the franchisor provides in terms of licensing and complying with the regulatory aspects of your franchise.

Finally, once your franchise has opened and starts bringing in customers, be sure to calculate the annual costs of keeping the business running, so that you can see what profit you have made. Also, a  common mistake made by new entrants into most businesses is that they do not separate their individual income from that of the business. It is important to remember that, while you may be operating a cash business, understanding the cashflow cycle is imperative, as financial mismanagement accounts for 80% of business failures.

Through Nedbank’s bigger-picture approach to business banking, our highly experienced and specialised team makes it their business to really understand your  franchise and sector, so that we can be an extension of your team, with full insight  of your working capital needs. Talk to one of our business managers or email us at franchising@nedbank.co.za to find out more about how we can help you launch and grow your franchise business.