The number of businesses owned by franchisees has increased by 14% in the last two years to 44,200, and these businesses are becoming larger as the franchise sector matures. With annual turnover rising, more than half of all franchised businesses now claim to be turning over in excess of £250,000 a year.
Things are looking up in the franchising world.
But let’s stop thinking about the turnover claim for a minute and start thinking about what matters to not only franchisors and franchisees, but also to any other type of businesses: The bottom line, which is cash flow.
For making your business endeavour worth your while, you obviously need to stay afloat. In order to do so, your franchise unit needs to be cash flow positive, that is, your income must be bigger than your expense.
That’s why your, say, £250,000 of annual sales is less important than what’s shown in the EBITDA column, your earning before tax, interests, etc. Your franchise might be able to generate £250,000 easily, thanks to the solid system you’re ‘renting,’ but if you’re cash flow negative, it’s definitely not good business.
That’s also why this post’s discussion is not on the turnover rate, but rather on the costs of running your franchise unit.
The true cost of running a franchise
In term of franchising, the cost of ‘renting’ a proven system that can allegedly improve your success rate is something that franchisees need to think about. Why? It’s simple: It doesn’t come cheap.
The entry cost for specific brands may vary, depending on the size or population of the territory involved and the level of support provided by the franchisor. Costs range from as little as £8,000, all the way up to more than £4 million at the time of writing but if you are looking for an average cost, £40,000 to £60,000 is a reasonable place to start.
As an example, a Computer Medics of America franchise costs around £4,000 for a population of up to 150,000 and £16,000 for a population between 850,000 and a million. Incidentally, if you are interested in this particular brand, you need to bear in mind that after five years an extra franchise fee, equivalent to 25% of the original fee, is required for those franchisees who wish to renew for another ten years.
Not only those costs of entry, but you also need to consider more costs, in the form of liquidity costs and ongoing fees. Again, those costs don’t come cheap. In fact, on average, ongoing fees account for 11.7 percent of sales. Not cheap at all.
Learn more about the costs
Check out this infographic for learning more about the costs in details: