Buying a Franchise

4. Costs and Returns

4.1 What are the costs?

• How much is the up-front fee? Good franchisors will usually make most of their profits from the continuing stream of royalty payments from successful franchises. The initial fees should only reflect the costs of franchise development and administration.
• How much will you need to invest? Check that the franchisor's figures include realistic costs. Ask whether items you buy through the franchisor (eg a sub-lease on premises) will include any mark-up.
• What percentage royalty is payable and how is it assessed? Some franchisors reduce the percentage payable once a set turnover is reached. By growing the business over that threshold you can increase your profitability.
• What price is charged for materials bought from the franchisor (eg stocks)? The franchisor may mark up the prices. Alternatively, you may benefit from the franchisor's buying power.
• What other charges (eg promotions, training) will you have to pay? Clarify what you get for your money.

4.2 What financial performance can you expect?

• What actual returns are existing franchisees achieving (see 5.3)? Be aware that the earliest franchises may have cornered the easiest or most profitable territories.
• What financial returns are projected for new franchises? Projections of very high profits from a small investment are probably unrealistic.