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23rd Mar 2010
A few studies have found the cost of a franchise unit is higher than establishing an independent small business.
This is mainly due to the fact that a franchise generally includes an initial franchise fee (average fee in Australia in 2008 was $40,000 in retail and $25,000 in non-retail franchises) in addition to the other start-up costs experienced in starting a business.
Depending on the business format start-up costs may include shop fit-out or uniforms for example, as well as legal and financial advice and more.
The initial franchise fee usually covers the franchisor’s costs, such as the cost of franchisee recruitment and selection, initial training and start-up support.
It may also reflect the value of the brand.
Franchisees can expect to pay more to enter a high profile and well established franchise business network than a new one.
And franchisees appear willing to pay this premium in order to gain entry and to benefit from belonging to the franchise.
Franchise benefits include:
The benefits of belonging to a franchise can be particularly appealing if it’s your first time running a business.
As mentioned above, depending on the franchise there may be additional expenses to the franchise fee, such as fit-out costs which will also need to be outlaid in the beginning.
When considering a franchise opportunity it’s a good idea to ask current franchisees how much money, in addition to the franchise fee, they had to spend to get started.
Despite the ‘extra’ cost of a franchise, what you need to consider when deciding whether to enter franchising or independent small business is the likely return on investment.
Are you likely to earn more being part of a franchise? Are you receiving value?
In franchising you get set procedures for operating the business, established supply chain and distribution networks and you may get products for your business cheaper than you would independently due to the greater buying power of the franchise.
These are all aspects to consider.
Being part of a franchise network you can also bounce ideas and trouble-shoot problems with other franchisees who are likely to experience the same issues, and you have the franchisor and/or franchise field support staff to provide advice as well.
The final thing you may consider is whether to enter business at all.
If your motivation is to make more money you should assess what your likely return on investment is going to be and then explore other investment options to see which is likely to bring the greatest returns.
Once you’ve assessed your motivations and conducted your due diligence, including investigating the real costs of entering a franchise and obtaining professional advice, only then should you sign the franchise agreement.
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