With so many franchise opportunities out there, chances are you can find one to suit your budget.
Usually, the franchisee will pay an upfront fee to cover the cost of setting up the franchise. This might cover the cost of any equipment you need to set up the franchise. For example, in the case of a mowing business, this may be the mower and trailer. You may also need to purchase products from the franchise under their system. In the case of a bakery, this may mean flour and other basic ingredients.
The benefit of this is that the franchisee usually enjoys the benefits of the economies of scale the franchisor reaps because each franchise uses the same products, resulting in a lower cost of doing business than the franchisee purchasing these products themselves.
How much do you want to invest?
There are franchising opportunities available at many different price points. A lawn mowing business might be bought for between $10,000 and $20,000, a more sophisticated business that requires property (such as a bakery) may cost around $100,000, whereas acquiring a franchise from one of the high-profile fast food chains may cost millions of dollars.
Franchises that run expensive television advertising campaigns, for example, will also usually cost more, but the additional marketing costs are often reflected in the business’s profits.
Once upfront costs have been paid, a franchisee will usually pay a licensing fee to the franchisor that can be anywhere up to 15 percent of either profit or turnover, depending on the franchise.
Do your homework
It’s important to do your homework and work out the return on investment you will receive. This is essential when it becomes time to secure finance for your franchise. Ideally, your accountant should also go through the financials of the franchise you are considering buying. This will be an important step in the process of acquiring finance for the venture.
A variety of options
When it comes to securing finance, there are a number of options.
Because a franchise is a proven concept, banks will often look more favourably at a franchise compared with a start-up operation. But you will still need to be able to prove your credit-worthiness. The banks will also want to see the financial forecasts for the business, to ensure you can meet the loan repayments.
Many large banks have specialists who work with franchisees to help them establish the right financial footing for their business. It’s an idea to work with a bank with a history of working with other franchises to ensure they understand both the potential and the limitations of this business model.
ANZ has a dedicated team that helps franchisees fund their business. There are also specialist lenders such as B Capital, a finance broking firm that provides acquisition finance as well as cash flow finance. (Contact ANZ at 1800 309 379. B Capital can be reached at 1300 136 595.) It’s an idea to ensure the lender you are using is registered with the Franchise Council of Australia, so that you can feel comfortable your financial adviser is well versed in the specialist area of franchise funding.
Sometimes, the franchisor will also be able to offer the franchisee financial support, or will work with the franchisee and their bank to secure finance.
If you are buying a franchise from a redundancy payment or other similar payment, make sure you talk to your accountant or another financial professional about whether your payout, or another form of finance, is the best way to fund the franchise.
How much does a Gloria Jean’s franchise cost?
Gloria Jean’s Coffees is one of the largest franchises the world, and is a good example to use to see how the financial side of franchising works in practice.
A Gloria Jean’s franchise generally costs between $350,000 to $500,000. This includes store fit out, equipment, training fees and all other fees and charges. Gloria Jeans’ franchise partners also pay a 6 percent royalty fee, which covers seminars and training about coffee-making and running a small business, as well as research and development of new products.
On top of this, Gloria Jean’s franchise partners pay an advertising fee of 2 percent of gross sales, which covers product brochures and promotional material, media relations, point-of-purchase displays. Gloria Jean’s supplies design and construction services if a new premises needs to be built.
Under the franchise agreement, the franchisee is also required to buy coffee, as well as equipment and other supplies, from Gloria Jean’s approved suppliers.