The costs of starting a franchise.

Many who want to start a business, choose to buy a franchise as starting from scratch is overwhelming. And that worries them a lot. 

If you’re uncertain at this point, please read the differences between starting a business or buying a franchise. You will be able to choose the option that fits you.

While some of you are ready to buy a franchise, you might be looking for some direction now. In general, before deciding on a franchise, many look at the brand’s familiarity, future outlook, and cost. 

To help you get started, this article covers the type of costs that you need to keep in mind:

Franchise & Royalty 

Your franchise fee is usually determined by the profitability of the franchisor. They can charge at varying ranges, anywhere from RM3,000 to RM300,000+. You may not enjoy paying for it. But, the sort of good news is it is typically a one-time payment.

In addition to the one-time charge, you also need to pay for an ongoing royalty fee, typically ranging from 2 to 10 percent of your monthly sales. It is like an ongoing membership charge to be part of the franchise. 

Advertising 

Some franchisors require you to pay a certain amount of monthly advertising fee, which is separated from the royalty fee. The fee is collected for a specific purpose, to promote the brand. By spending the advertising fee collectively, it will generate greater impact and visibility than you do it independently. 

Accounting, Legal, and Secretary

Poor financial management is one of the main reasons for businesses failure. Therefore, you need a qualified full-time/part-time accountant to keep track of your expenses and recommend the amount of working capital you need. 

As for legal, you need a lawyer to review the franchise agreement. It is to ensure all the terms included in the agreement are legal Remember, the amount of time you spend with them will determine the final cost. 

Lastly, if you are taking the franchise under a private limited or public listed company, you need the company secretary service as it’s a legal requirement in Malaysia. It is to ensure the company adheres to the legal practices and that the decisions of the board of directors are implemented.

Location

Most franchise businesses operate out of rented space, typically in the form of retail shops. With that being said, you’re liable for the monthly rent, one-time security deposit and renovation under franchisor’s specification, which often represents the largest investment when setting up the business. 

Equipment

Many franchisors require the purchase of various and specific pieces of equipment. For this, you can approach banks for loans to purchase the equipment. Banks might approve it because the equipment can serve as collateral. 

Signage

You are obligated to purchase signage for your shop. The average price of a signage sign is between RM20 – RM25 per square feet. It can also be a very expensive initial cost for you.

Inventory

Franchisors will require you to stock up on a set amount of inventory. However, it varies based on the type of industry. As a franchisee, you should always carefully plan and maintain an optimal inventory balance. 

If it’s too low, you might fail to convert a potential customer to buy your products, whereas too high of an inventory balance might result in wastage when you can’t sell it out.

Working Capital

You need to set aside an initial working capital budget to pay for monthly obligations until your business reaches positive cash flow. 

For rent and internet, you’ll have to pay a deposit. In addition, you need money in the drawer to make a change. You also need money to pay your staff, which is going to be the largest ongoing expense. In short, you’ll need money just to operate until there’s a cash flow. 

Travel and Accommodation while Training

Don’t forget that you need to attend training routinely held by franchisors. Even though you don’t have to pay for the training fee, you are responsible for your travel and accommodation expenses. Be prepared, the training might last from a day – 2 weeks.

A Final Note

Most of the time, you can request the franchisors to provide you with a detailed cost structure. For easy understanding, the franchisors like to group several costs above into so-called “initial investment cost”. Still, the cost of starting a franchise business varies greatly and depends on many factors. But with clear information and cost expectations, you can avoid many financial missteps faced by novice franchisees.