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The costs of a franchise

When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account.

Initial costs

The franchisor - the company which sells you the franchise - usually charges an upfront fee. This should be a relatively low administration fee. Good franchisors make most of their profits from continuing royalties.

Your largest initial costs are usually your investment in:

  • premises
  • equipment
  • initial stock

Continuing costs

You usually pay a royalty - a percentage of sales - to the franchisor. Alternatively you may pay a management fee of some kind.

Under the terms of the franchise agreement, you may have to purchase stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their purchasing power.

You also have to pay the usual business costs - for example, rental on premises, utilities or the costs of any employees you take on. Again, check whether anything you pay for through the franchisor has a realistic cost.

Check too whether the agreement includes additional charges. For example, you may be required to pay for training, or contribute to the cost of national advertising campaigns.