Updated: 9th January 2020
Buying a franchise typically involves a considerable initial investment to set up, advertise, and obtain legal advice, but ongoing costs can also be draining if the business is struggling financially.
Start-up costs can vary greatly according to the type and size of franchise, but initially you may need to fund refurbishing/fitting out premises or the purchase of a vehicle, for example.
You may also require sufficient working capital to pay suppliers and other bills until the business starts to make a profit. But what about the ongoing costs when you run a franchise business and what can you do if you can’t afford to pay them?
The ongoing costs of running a franchise include a royalty fee, also known as a management services fee, and this is for the right to use the franchise on a continuing basis. This is how a franchisor earns an income from the business, and it’s a major financial liability as a franchisee. Royalty fees are usually charged as a percentage of monthly sales, although occasionally they may be a fixed fee.
Advertising fees are generally charged to every franchisee, and combined to fund the franchise brand as a whole. Again, they’re usually charged as a percentage of sales.
When the franchise term comes to an end a franchise renewal fee may be charged to enable you to continue using the brand name. If so, the details should be included in the contract.
As you’re already aware the costs of running a franchise are considerable, and if turnover isn’t as healthy as you would like, it’s understandable if you can’t afford to pay your franchise costs.
So what happens in this situation, and is there anything you can do to get back on track with your franchise payments?
If you don’t pay your franchise costs you’re breaking the terms of your contract. As a result you may lose your business and face legal action by the franchisor. It’s advisable to be open with the franchisor and let them know at the earliest opportunity that you’re struggling to pay, as they may be willing to lower the fees temporarily until turnover improves.
Don’t forget that it’s in their own interests for you to succeed. Part of their income is based on the sales from your business so they’re unlikely to take severe action quickly if they understand your situation and you have a good working relationship.
Also, if they’ve franchised their business for some time or have previous experience with franchising, they won’t expect all their franchisees’ businesses to run smoothly all the time. Part of their role as franchisor is to support you in your efforts, and this includes when business declines.
One option you have if you can’t afford your franchise costs is alternative funding, such as invoice finance. This is a flexible method of financing a business – it could help you with your current situation, and also provide a solid financial base on which to operate in the future.
Real Business Rescue has working relationships with over 50 alternative lenders in the UK, and can put you in contact with the best ones for your needs. We have extensive experience of helping franchise businesses and can also advise on other potential solutions when you can’t pay your franchise fees. Please contact one of our licensed insolvency practitioners to arrange a free same-day consultation – we operate from a network of offices nationwide.
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