Financials Of Franchising - World Options — World Options

When deciding to invest in a franchise, one of the most important factors to consider are the financial details.

Many franchisors will list the most attractive numbers on their websites, whether that means high revenues, a low initial investment cost or the return on your investment over a certain period of time.

However, it’s also important to speak to existing franchisees and conduct your own research to make sure you are prepared for all eventualities.

For example, how much annual revenue are below-average franchises earning?
What is the lowest amount you could expect to make each year?

If your calculations are made based on median averages, you should prepare for the possibility that your franchise will see below-average success, particularly when you first start.

At World Options, our franchise model has helped many people to go into business for themselves and start earning a great income, but we also want to ensure that all of our franchisees have realistic expectations for their success.

Below, we’ve explained some of the things you will need to consider before you commit to investing in a franchise.

Start-Up Costs

The initial investment cost may be one of the first things that attract you to a particular franchise. This can range from less than £10,000 to more than £1 million, depending on the type of franchise you are investing in, and it may or may not include training, equipment or other things you will need to get your business started.

Beyond the upfront cost to invest in the franchise, other start-up costs might include:

Buying or renting a building or workspace
Training
Stock or equipment
Living expenses
Business licences or other fees

It can be very expensive to start a business, but many franchisors with higher upfront investment costs have relationships with funding partners or financial institutions that can help.

In these cases, you may only need to raise a portion of the upfront cost in order to qualify to invest in the franchise, but you will need to factor loan repayments into your calculations in these cases.

Operating Costs

By speaking to existing franchisees, you should be able to estimate what your franchise’s outgoings will be. These will often be comparable to non-franchise businesses within the same industry, except that with a franchise business you will also pay a monthly fee to the franchisor.

This will usually be calculated as a percentage of your turnover, so make sure to factor this into your calculations.

Some of your operating costs will also scale based on your level of success, so you should factor this in, but make sure to compare these outgoings to the lowest levels of revenue that you might make as some of these outgoings will not scale down.

The Break-Even Point

The break-even point is the stage at which your franchise has earned back the money you spent to invest in it. That means that, when you pass this point, you will start making money on the franchise, and even for many of the most successful franchises in the world, it can be further away than you might expect, so it’s important to plan and ensure that living expenses and other outgoings are covered during this period.

For example, it can take ten years or even longer for a McDonald’s franchise to break even, due in part to the high upfront costs and the expenses associated with operating a fast food restaurant.

Other businesses may have lower upfront costs or outgoings - for example, online businesses where you can work from home - but may also generate fewer sales, or have smaller profit margins, all of which will affect your break-even point.

To calculate the break-even point, divide the sum total of your investments by your annual (or monthly) net profit to determine how many years (or months) it will take to reach that number.

In the case of McDonald’s, the break-even point might move even further away; occasionally, franchisees are required to purchase new equipment to enable them to make new products that the company has added to the menu.

The numbers will change from business to business, but it is vital to understand these calculations and to know what to expect as part of your research phase.

BFA Accreditation

A final consideration is to see if the franchisor is accredited by the British Franchise Association. If so, you may benefit from an additional level of security on your investment.

Franchises are only accepted as a member of the BFA once they meet certain standards. For example, the franchise must prove that the product or service being offered is marketable and profitable enough to support a franchised network.

They must have the foundations in place for franchisees to be able to embrace the franchise model and run their businesses efficiently and independently.

BFA-approved franchisors must also comply with the European Code of Ethics, demonstrating ethical principles across advertising, recruiting, selecting and interacting with franchisees.

All data, statistics and figures that a franchisor presents to you must be legitimate and unambiguous, meaning that you don’t need to be concerned about them hiding crucial data or information regarding your investment.

Learn More

If you are ready to start your franchise journey, you can learn more about how to start a World Options franchise on our franchise opportunities page. For more information about starting your business journey by investing in a franchise, look at the other guides in our series.