Dec 262011

What sort of payment structure does the franchise have?

Look at the initial and ongoing payment structure.

There will be an upfront fee for the training and the purchase of the license to use the franchise name and model. There will also (in 99% of cases) be an ongoing monthly fee. If the initial payment is very high and the ongoing small this can be an indication that a franchisor will take little interest in you once you’re signed up as there’s no real incentive for them to spend time and money supporting you.

The ongoing payment structure is usually set up in one of three ways:

The monthly fee may be a standard amount each month. For example, every month – regardless of how much business you do or don’t do – you may have to pay, say, $1000 or £1000. When you’re just starting the business this can seem a serious amount of money that you need to budget for in your working capital forecasts. Some franchises may give you a grace period of 1 to 6 months before these payments kick in which allows you to build up a client base. The benefit to this system is that as your business grows the monthly fee becomes a smaller and smaller percentage of your turnover. However, if your business is not doing well then this monthly amount can be crippling t your cashflow.

The second alternative is that the monthly payment is a percentage of your turnover each month. For a struggling business this is beneficial, but if your business is doing really well you may start to despise the fact that your hard work is going into someone else’s pocket.

The third way is a combination of the other two. There may be a minimum amount you have to pay and then if you have turnover above a specified level you then start paying an additional amount.

Note that the payments will probably be based on turnover rather than profit – there’s a big difference.

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