financial aspects of a franchise

FINANCIAL ASPECTS OF A FRANCHISE

Estimating Financial Requirements

Two-basic categories of financial requirements for a franchise business:

1. Estimating Cost of entry

2. Estimating Cost of Operation

1. Estimating Cost of Entry

A prospective franchise is required incur certain cost to enter a franchisee system.

There are two options available to enter the franchisee system:

>> Entering a New Franchise>>> Entering an Existing Franchise

Entering a New FranchiseThe cost of entering new franchisee includes expense right from the start up expenses. They would include the following:

(i.) Location and Site selection

A potential franchisee has to select specific location and site according to the franchisor’s site selection procedure. Some franchisors offer formats and accordingly ask for different space requirements. The cost of acquiring the space equivalent to the requirement of the franchisors, a potential franchisee can work out the total cost of space on either ownership basis or obtaining on a lease.

(ii.) Interior and Decoration

Interior and decoration plays vital role in creating a store layout and store ambiance. A store has to be designed in accordance with the type of merchandise to be retailed and type of customer’s services to be offered.Franchisors have a definite guideline pertaining to frontage, lighting and other amenitiesSuch as air conditioning unit, water purifier, toilet block etc.

(iii.) Furnitures and Fixtures

Some franchisees supply furniture on their own or provide specification and a list of vendors from where the franchisees can buy furniture.Certain equipments vary critical to the core products/services may be provided by the franchisers themselves.

(iv.) Licensing and Permission

It is important for a franchisee to obtain necessary license and official permission from competent authority, in order to start the business. Generally, license under Shops and Establishments Act is necessary to set up a shop for retailing. Moreover, a special permission is required under the same act to keep the store open for 24 hours.The cost of obtaining such license and permission must be accounted for as start up expense and may be considered as a cost of entry.

(v.) Franchise Fee

Some franchisors charge a franchise fees for their franchisees while signing the contract. It is therefore, also known as contract signing amount usually is not refunded to the franchisees if the relationship comes to an end. The franchise fees vary in tune with the brand equity the franchisor enjoys the profit potential of a franchise, size of the market, growth potential, tenure of the franchise agreement, and the on-going support the franchisor promises to extend.

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