Thinking of investing in a liquor franchise? Emma Jervis, Practice Group Leader at LegalVision explains how much you will need to spend.
Franchising is a popular business model that has been gaining traction in New Zealand for many years. Franchising allows entrepreneurs to own and operate a business with a proven track record of success. However, when investing in a franchise, you will incur several costs and fees. Some of these fees are one-time payments, while others are ongoing. As such, you may wish to understand the costs and fees involved before venturing into a franchise opportunity.
Initial Franchise Fee
The initial franchise fee is the amount that you pay to purchase the right to use the franchisor’s intellectual property, business systems and to exploit the goodwill of the franchise brand. Specifically, this typically includes the right to use:
● the brand name and logos;
● operating system; and
● other proprietary information.
This initial fee is typically non-refundable and gives you the right to operate as part of the franchise system within the specified term of the agreement. It is a one-time payment that is usually payable when you sign the franchise agreement.
Royalty fees are ongoing payments you make to the franchisor for the continued use of their brand name and operating system. The royalty fee is an essential part of the franchise model, as it enables the franchisor to continue supporting their franchisees with the following:
● process improvement and development;
● training; and
● ongoing business support.
This fee is usually a percentage of your gross sales and is often paid monthly or quarterly. Some franchisors charge a fixed ongoing franchise fee.
Most large franchise networks require their franchisees to contribute to national or regional marketing franchise costs. These funds are used to promote the brand across all franchise locations, on a larger or national scale. Marketing levies are usually a percentage of your gross sales, and you pay it either monthly or quarterly.
Franchisees receive training and ongoing support from the franchisor to help them run their business successfully. This includes training on:
● the operating system;
● marketing strategies; and
● other aspects of running a business, such as accounting.
The initial franchise fee will usually cover initial training. However, this may be an additional cost you pay in certain franchises, for example if training is required when a new nominated manager is appointed to the franchised business.
Franchise agreements typically have a term of five to 10 years, after which the terms of the agreement may permit the franchisee to renew the agreement. The franchisee pays the franchisor renewal fees to extend the franchise agreement for another term. Your renewal costs depend on the franchise in question and can greatly vary.
If you wish to sell your franchised business, most franchisors will require you to pay an assignment fee. This can either be a fixed fee or percentage of the sale price.
The day-to-day running of a franchise must be considered on top of fees payable to the franchisee. Such costs include:
● staffing costs;
● inventory and equipment;
● raw materials;
● cleaning supplies;
● insurance; and
● computer costs, including software and hardware.
One of the most commonly overlooked costs of franchising is working capital costs. Most businesses will take at least several months to start seeing a profit. Working capital is the funds needed to keep things running in the meantime. This might consist of between six to 12 months’ worth of operating expenses.
You may wish to obtain professional advice when purchasing a franchise. Specifically, you might hire an experienced franchise lawyer to review all legal documents. Likewise, you may find instructing an accountant is a useful investment to ensure your books are in good order.
Another cost associated with operating a franchise is the cost associated with having a place to operate your business. For example, you must pay for a lease if you are a premises-based franchise. You will also have to pay the costs of fitting out your location. Such a fit-out will need to be done in accordance with the franchise agreement.
On the other hand, mobile franchises will require you to have a vehicle. This comes with its own fit-out and operational costs, such as the price of vehicle wrapping, fuel and vehicle maintenance. You may even need to pay for a separate storage space to store excess equipment and inventory.
Some franchises operate their business from home. However, this does not mean you do not have location costs. For example, you will still likely need to buy new furniture or equipment. Further, you may again need to pay for a separate storage location to store excess equipment and inventory.
Franchising brings with it a range of fees and operational costs. It is essential to consider these expenses before venturing into buying a franchise. Some of these costs and fees include:
● initial franchise fee;
● royalty fees;
● marketing levy;
● training and support fees;
● renewal fees;
● operating costs;
● working capital;
● professional services; and
● location costs.
If you need assistance understanding the costs and fees associated with operating a franchise in New Zealand, call LegalVision on (0800) 447 119 or visit the membership page.
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