Some franchises cost less than $10,000, others more than $1 million. The rest can be anywhere in between.
Depending on the business, these costs will fall into the following broad categories:
- franchise fee
- fixtures and fit out
- plant and equipment
- IT hardware, software, connections and backup
- motor vehicles such as cars, vans and trucks
- 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 products.
“These are the obvious outgoings to budget for, but there are others that can really hit hard,” says Peter Knight, a business and franchise accountant with Franchise Accounting & Tax. “For example, you need to factor in professional advice from lawyers and accountants, setting up a business trading structure and, depending on the amount you borrow, finance costs can be significant. Plus a rental bond or deposit is typically required, which is two to three months’ rent.”
You need enough funds put aside to cover the first few months of building up your business, particularly if you bought a greenfield site.
“You should also check whether you’ll be required to refurbish, refresh, or rebrand after a certain period of time,” Knight says. “Some shopping centres require their tenants to refurbish their stores or sites regularly so the centre always looks up to date.”
The impact of Covid
Covid has introduced a raft of new financial challenges for would-be franchisees to consider.
“Lockdown and other restrictions have interrupted supply chains and delayed delivery,” Knight says. “The resulting shortage of materials and equipment is increasing holding and funding costs for businesses, including franchisees. Staff shortages are driving wages up in some areas and, for everyone, there’s the threat of higher inflation, which would increase the cost of supplies, materials, rent, rates and wages. This would throw any budgets out of alignment and reduce predicted profitability.”
Costs and returns
Pool cleaning franchise
Annual return on investment at 25 per cent: $25,000
Other than the lease or purchase of a van, start-up costs include uniform, chemicals and promotional material. Some franchisors include these in the franchise fee.
Fast food franchise
Investment: $1 million
Annual return on investment at 25 per cent: $250,000
Along with plant and equipment, furniture and fixtures, meeting the requirements of the Food Premises and Equipment Standard can add significant costs. It covers the provision of compliant water supply, sanitation, lighting, walls and flooring, ventilation and storage.
“A bigger investment should bring a bigger reward, but that doesn’t make one better than the other,” Knight says. “It all comes down to what the franchisee is looking for, what they can afford, their risk appetite and why they’re interested in a particular franchise.”
Red flag moment
Overlooking costs such as legal, accounting and other fees gives a false impression of your investment costs.