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Get Started in Franchising: Financial aspects of franchising

by Kurt Illetschko

The financial aspects of franchising can be divided into two categories affecting franchisees and franchisors respectively. The focus of this article is on franchisees’ financial obligations but closes with a brief explanation of the investment new franchisors need to make.

Franchisee
● Initial fee: Fixed amount payable once only. It gives the franchisee the right to receive comprehensive initial assistance and trade under the network’s brand. The amount varies depending on the extent of initial assistance and the popularity of the brand.
● Capital investment: Cost of purchasing equipment and fitting out the business for trading.
● Working capital: Money required to fund operations until the business’s cash flow covers ongoing expenses.
● Management services fee: Usually calculated as a percentage of the franchisee’s sales. It is payable monthly in arrears for the duration of the franchise arrangement. The percentage figure varies from 1-12%.
● Marketing fee: Calculated either as a percentage of the franchisee’s sales or as a fixed amount. It is used towards funding product marketing initiatives carried out by the franchisor.

Prospective franchisors
Before a franchise can be rolled out, the prospective franchisor needs to invest in a professional franchise package. This entails professional fees, printing costs and research expenses. It is also necessary to budget for operational losses for the first 2-3 years until franchise fee income covers operating expenses. Beyond that point, franchising can be highly profitable.


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Set Up a Successful Small Business: Small business advice Many organizations are eager to advise small businesses, including:
banks
the Department for Work and Pensions (DWP): www.dwp.gov.uk
the Department for Business, Innovation and Skills (BIS): www.bis.gov.uk
local authorities
local colleges.
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Set Up a Successful Small Business: Methods of trading Sole trader: This is for a one-person business. You do not need to register with any official body, but you do need stationery with your name and business address. You must inform the DWP that you are self-employed. You are personally liable for all your business transactions and debts.
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Set Up a Successful Small Business: Book-keeping and accounting Book-keeping and accounting are two different and distinct aspects of financial transactions. Book-keeping is about ‘doing the books’, keeping strict and accurate records of all day-to-day transactions, doing VAT returns (if your turnover is £68,000 or more – 2009 figures) and paying wages if you employ others.
Set Up a Successful Small Business: Tax for small businesses Let your accountant handle your tax returns and all correspondence with HM Revenue and Customs; it will save you a great deal of time and, probably, money. The tax year runs from 6 April one year to 5 April the following year, irrespective of your company’s financial year. Your self-assessment returns must be in by 30 September if you want HM Revenue and Customs to calculate how much you owe. In any case your return must be in the following 31 January, or penalties will apply. Be honest with your accountant.
Get to Grips With Book Keeping: Trial balance The purpose of the trial balance is to help find any errors that need to be amended in order to be able to then go on to prepare the final financial statements, i.e. the balance sheet and the profit and loss account.
Get to Grips With Book Keeping: The trading, profit and loss account The preparation of the trading, profit and loss account is carried out from the details listed in the trial balance, i.e. specifically the amounts which relate to the operating expenditure and operating revenues of the business
Basic Accounting: Balance sheets The purpose of the balance sheet is to set out the financial position of a business at a particular moment in time. It identifies the different forms in which the wealth of the business is held. The assets of the business are often listed first followed by the liabilities (i.e. financial obligations) of the business.
Get to Grips With Book Keeping: Ledgers In a small business all the double-entry accounts can be kept in one book, called a ledger. As a business gets larger more books would be required, entering similar types of transactions together. There would be a different book for each type, keeping dissimilar transactions separate. Sales would be entered in one book, purchases in another and cash in another.
Get to Grips With Book Keeping: Types of small business There are three main categories of business; sole trader, partnership and limited liability companies. Any of these three categories can however, be a small business.
Get to Grips With Book Keeping: Book-keeping principles In making book-keeping entries, we need to consider how each transaction has affected the business. In doing so, you may find it useful to think in terms of its sources and uses of funds
Get to Grips With Book Keeping: Value added tax Many countries levy a sales tax which requires businesses to add a fixed percentage to the selling price of their goods and services on behalf of the tax authorities. In the UK, this is known as Value Added Tax (VAT) and the appropriate percentage (currently 17.5% for most goods and services) has to be accounted for to Her Majesty’s Revenue & Customs (HMRC).
Get to Grips With Book Keeping: Book-keeping for clubs, societies and charities In smaller ‘not-for-profit’ organizations, the basic objective will be to provide a record of the money that has been received and account for the way in which it has been spent – often nothing more than this is required so the accounting principles that are used can be fairly simple.
Get to Grips With Book Keeping: Cash flow Cash flow is often described as the blood of business, due to its importance in ensuring commercial survival.
Get to Grips With Book Keeping: Book-keeping history From approximately 4000 BC , the growth of trade led to a need for record keeping in the Mesopotamian river valleys. Findings dating from about 3300 BC indicate that Sumerian temple officials used wet clay tablets to record stocks and transactions. For example, landowners would record the number of livestock placed under the care of farmers with special clay symbols.
Close More Sales: Keep price breakdown information to yourself In a selling situation, a professional buyer will ALWAYS push you for price breakdown information, and the more you give them, the more they’ll use it against you! That’s why you should always keep price breakdown information to yourself.
Get to Grips With Book Keeping: Ask for a referral with every customer you meet After every sales visit, regardless of the outcome, if you can acquire the habit of asking a simple question just before you leave, you will be able to maintain a constant flow of high quality sales leads.
Close More Sales: Confirm every sales appointment with a PS letter or email Have you ever gone to an appointment that you had originally made by telephone, only to find that when you get there, the prospect is unavailable because they had forgotten about it? If so, then you’ll already know how frustrating it is - not to mention a complete waste of your valuable time! That’s why it’s always a good idea to make a point of confirming every sales appointment by letter or email, straight away.
Close More Sales: Make good use of the customer’s name People enjoy hearing the sound of their own name because it is distinctly personal. Indeed, in an increasingly impersonal world, perhaps it’s true to say that, in business these days, using someone’s name, remembering it and getting it right is more important than ever before.
Close More Sales: Use the ‘try before you buy’ close In a face-to-face selling situation, it usually proves to be an irresistible offer to let your prospects ‘try before they buy’ and enjoy the benefits of your product during a free trial period. Providing your product lends itself to his idea, it’s a great way to reduce sales resistance, and give your product the chance to sell itself.
Close More Sales: Exercise your expertise power As an experienced professional salesperson, the chances are you know more about your industry, your market, your competitors and your products and services than just about any other person alive – and don’t forget, that includes your buyers! The fact is, you are an expert, and let’s make no mistake about it, during the course of a sale that expertise is a powerful persuasive force.
Close More Sales: Harness print power The fact that something is printed tends to enhance its believability. It has a kind of built-in authority that the spoken word or handwritten materials just cannot match.
Close More Sales: Pay unexpected attentions Giving ‘unexpected attentions’ is the simple idea of delighting your customers by sending them a little something from time to time – something that’s totally unexpected.
Close More Sales: Use pre-printed telephone inquiry pads There are a number of benefits to using telephone inquiry pads. Quite apart from ensuring that you always come across as highly professional whenever answering the telephone to a new prospective customer, over time it provides a source of information that is crucial to your ability to evaluate the effectiveness of your promotional activities.
Close More Sales: Explore the buyer’s personal interests Always go beyond just finding out what buyers need and want and try to uncover any underlying personal motivations too. In effect, the personal interests of the buyer often represent a ‘hidden agenda’ which is potentially the most powerful of all information for the salesperson.
Get Started in Franchising: Legal aspects of franchising Franchising is a complex arrangement and the franchise agreement needs to reflect that. Many prospective franchisees are shocked to find that it runs into 70 pages or more but this is necessary. Unlike most other agreements, the franchise agreement covers a myriad of different transactions that are closely interlinked.
Get Started in Franchising: Financing a franchise Investing in a franchise is probably the largest financial transaction you will ever undertake, and you will have to borrow money. In most instances, this money will come from a commercial bank but other sources of funding exist. Let’s look at these first.
Get Started in Franchising: Who owns what in a franchise? Questions asked frequently at franchise seminars indicate that this topic is surrounded by confusion. It’s quite simple: The franchisor owns the intellectual property while the franchisee owns the business infrastructure. What does this mean?
Get Started in Franchising: What is the best franchise? People ask me this question all the time but unfortunately, I don’t have the answer. The best I can hope to do is to tell you how it works in practice.
There is no such thing as ‘the best franchise’. If it would exist, everyone would invest in it, the market would become oversaturated and it wouldn’t stay the best franchise for very long. The human factor comes into play as well.
Get Started in Franchising: International franchises People go on holiday, see some exciting concept and want to take a franchise back home. Unfortunately, it’s not quite as straightforward as that. Franchisees are entitled to receive a business package that has been tried, tested and proven to work – in their market! Unless the foreign company has representation in your home country, granting you a franchise would be outright irresponsible.
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