Hello and welcome. My name is Amie Larter and this is the Buying a Franchise podcast, vital listening for anyone interested in buying or that’s in the process of buying a franchise. Each episode I’m joined by the fabulous Sarah Stowe, editor of Inside Franchise Business, Australia’s leading franchise hub to help guide us through everything we need to know about the franchise buyer’s journey. Now we know, Sarah, that the question, what does it cost to buy a franchise is utmost in people’s minds when they start thinking about ways to become their own boss. It’s definitely a popular online search term and something you that you’ve probably been asked more than a few times.

Sarah (01:08):

Hi Amie. Yes, it’s something I’m often asked. The good news is it can cost you less than $50,000 to buy a business operating from home, and that makes business ownership really accessible. That’s the starting point. Of course, at the other end of the scale, it could cost at least $1m to buy into a big name retail or food brand. The premium end of the market is the realm of McDonald’s Hungry Jacks, Guzman, Gomez, and big retailers like Total Tools and Bedshed.

 Of course, the great majority of franchise opportunities sits somewhere between these two extremes, and that means that with such a broad cost base from affordability to, to top end premium, it really does mean there is something for everyone in franchising. But following on from that question, I think there are further questions we can ask, which can help someone looking to buy a franchise, get a grasp of whether a franchise is affordable for them and viable.

Amie (02:05):

Well, that’s exactly what we want to know, and I’ve got a long list of questions for you. So let’s get the low down on some key facts, Sarah, starting with the difference in price between a new and an existing franchise.

Sarah  (02:17):

Well, if you’re buying an existing franchise from the current franchisee, this franchisee can of course set their own price. And this will depend on the success of the business, the location, and the reason the franchisee is selling. For instance, if it’s a distressed sale, perhaps the franchisee has illness in the family or, or a change of circumstances, a speedy purchase is usually more important to them than a high price. The price, of course, is also affected by whether the business has lots of potential for growth or whether it is at its peak.

There are a couple of differences in terms of the franchisor’s charges as well. In the case of an existing business, although this is a sale between two private entities, the franchisor will charge the new franchisee a transfer fee. However, if you are buying off the franchisor a new business that hasn’t yet opened, what’s called a greenfield site, then the franchisor will charge you a set franchise fee.

Amie (03:13):

Okay, so tell me a little bit more about the set franchise fee. What is that likely to be? Is, is there a standard amount?

Sarah (03:21):

There’s no set price for this. Franchisors charge a fixed upfront franchise fee for the right to access the concept, the operations systems and processes and the brand. That’s what you’re buying into when you buy a franchise. Now this fee should cover costs such as basic training, support, and promotion. Many franchisors include many more extensive benefits. General costs such as market research planning, franchisee recruitment may also be included. It’s a way of passing costs onto franchisees.

Amie (03:52):

So a franchisor can really charge whatever they want,

Sarah (03:55):

They can, but smart franchisors will have insured the fee they’re asking for has been fully costed and it’s not just been plucked from thin air. Franchisees generally turn to franchise consultants and lawyers to help them formulate the franchise offer, and these experts know how competitive the market is. That’s why it can be hugely beneficial to seek advice from these experts yourself to get someone who’s in the industry to give you feedback on whether or not the franchise fee is too high, whether the ongoing costs are reasonable, among other things.

Amie (04:26):

For the sake of clarity, let’s focus on what’s included in the cost of a new franchise. Sarah, I imagine every business has a different set of inclusions depending on the type of operation.

Sarah (04:36):

Well, it’s likely that training, marketing, IT and, and any tech tools required for the business are actually provided. In some cases there are fixtures and fittings, equipment, vehicle leasing, branding for a vehicle or for, for any other elements, any stock that’s provided. Or in fact any of these may or may not be included in the price. There’s no standard. If everything you need to run your business is included, it’s what’s called a turnkey operation. If it’s not, then you will need to account for what’s left out and of course add it to, to the quoted cost.

So if you want to buy a pool cleaning business for instance, you’ll need to know whether the uniforms, the vehicle and the chemicals that you need to operate the business are expenses you have to add in. Similarly with a dog-washing operation, say, does that price include a customised vehicle or is this an add-on?

(05:34):

Think about the cost of fitting out your business with all of the equipment, the infrastructure and branding that’s needed to make it consistent with brand and legal guidelines. It will depend on the amounts of work that’s required. If your cafe, for instance, is already set up as a food outlet with a basic infrastructure in place, you’ll end up paying much less than if it has to be fitted out from scratch. There might be assets specific to the business, from the tools of the trade for a handyman franchise to customised equipment for the preparation of specialised food design or any products. And of course, there are some low-cost home-based businesses that operate predominantly online, which have little to no operating costs other than a laptop and some software. The lack of setup costs can be a big attraction for some franchisees

Amie (06:24):

I can imagine. Okay, so just to be super clear, I’m going to imagine I’m buying a turnkey food franchise. Does that mean I’m not going to have any other costs other than the price quoted to me by the franchisor?

Sarah (06:38):

Not quite. You’ll be operating from premises. So a retail bond or a deposit is typically required, and that’s usually two to three months’ rent. One accountant who works closely with franchisees and franchisees, Peter Knight, has pointed out that for a fast food franchise, there are also requirements of the food premises and equipment standard and, and that can add significant costs. To meet the standard you have to comply with you have to have compliant water supply, appropriate sanitation, lighting, walls and flooring, ventilation and storage.

There are also commitments if you are buying into a franchise in a shopping centre. Some landlords require a store to be refurbished to be rebranded after a certain period of time. If you don’t know your newly acquired business is going to need an expensive refurbishment in six to nine months’ time, that’s going to be a massive dent in your finances that haven’t been accounted for. So although something like refreshing a store is going to be business cost in the future, you’ll need to know there are big costs coming,

Amie (07:44):

Right? So it’s all of those hidden expenses I suppose that we don’t necessarily think about early on when looking at a franchise,

Sarah (07:51):

It’s very obvious with a big food retail business because the costs are much higher than in some service businesses, but all franchise buyers really should find out early on what hidden extras they will need to pay as a startup. Definitely.

Amie (08:06):

Okay, so what about business costs? Obviously a franchisee is using the franchisor’s brand, but will there be other costs to set up the business?

Sarah (08:16):

Yeah, there are, these are costs that you need to put in the budget. You will have the cost of setting up a business trading structure, any local council requirements you need to fulfill, you’ll have to pay for those, the relevant business and public liability insurance, for instance. And, and depending on the amount you borrow, of course you’ve got loan repayments. You also need working capital, which is effectively enough funds put aside to cover the first few months of building up your business, particularly if you bought a brand new site that hasn’t been operating before. And something that might surprise people is that franchisees are allowed to pass on their legal costs of preparing, negotiating and executing the franchise agreement. These costs must be specified in the franchise agreement, so you’ll know about them up front, but you do need to add them in.

Amie (09:03):

A surprise indeed, Sarah. Definitely an insider tip there. So legal fees always a hot topic, I suppose. You mentioned before in the previous podcast that franchise buyers should really seek advice from a lawyer. I suppose we have to factor in those costs as well.

Sarah (09:22):

You do and and it’s something that’s often skimmed over, understandably so. Franchise, franchise buyers have a whole heap of expenses falling in their laps and legal and accounting fees are often seen as something to be really avoided. I would suggest though, and, and it would certainly be a common piece of advice throughout the franchising sector, there is a lot, there is a lot at stake in buying a franchise. So it’s actually better to pay for your legal advice up front and avoid possibly a more damaging expense down the track because something has gone wrong. If you overlook expenses such as legal accounting and other fees and the price of starting up your business, all those other elements that we’ve already mentioned, you do get a false impression of your investment costs.

Amie (10:09):

Like any business, Sarah, knowing what you’re getting yourself into up front is essential. To recap on what you’ve mentioned when considering how much a franchise is going to cost, potential buyers should be considering whether the franchise is new or established. You mentioned franchise or fees and any extras that need to be added into operate the business. So the cost of leasing premises or vehicles and any of those hidden extras like insurance council, council permits and legal fees.

Sarah (10:38):

That’s right, Amie. And, and I think the point is really that you can, going back to the original question – what does it cost?- you can buy a franchise at any level. But you will probably have to add in all of the extras that you’ve mentioned to what looks like the initial cost. So just a little bit of homework to do before you can kind of get the total cost involved, but you can buy a franchise at almost any price.

Amie (11:04):

Thank you for your insights as always, Sarah, and as usual in the show notes. Below, we’ve got more information about the topic and is, and as with everything in franchising, there are crossovers and connections with other topics. So don’t forget to check out crucial podcasts, including can you afford a franchise? It’s the perfect pairing with this episode. And if you need a little inspiration, have a listen to our Spill the Biz series, interviews with founders and leaders in Australian business. Thank you for listening.