What could be more exciting than one day being a regular customer of a franchise outlet, and the next day being an owner? But, like all business ventures, it's best to enter a new situation with your eyes wide open.

So, do you know the primary financial considerations you should have when buying a franchise? If not, we have you covered. Carefully consider them before you cut the ribbon on your grand opening ceremony. 

1. Upfront Franchise Fees and Startup Expenses

Before you launch your franchise journey, you'll have to pay an initial fee to obtain the right to do business under the franchisor's name. Typically, that payment also includes training and setup.

Generally, the bigger the franchise, the more expensive the initial fee. In the UK, the estimated average cost is £42,000. But upfront fees can easily be far more for luxury products and services. 

Inquire as to whether the fee is refundable. It may not be, or it may only be partially refundable. 

Don't be afraid to ask additional questions. Where are you allowed to operate? Does the franchisor require you to pay for a new building? Are you allowed to rent an existing building? 

What special licenses will you have to buy? How expensive is the mandatory insurance you'll need? 

2. Ongoing Royalty Fees, Marketing Fees, and Working Capital

Franchisors also charge royalty fees, which are ongoing payments you'll typically have to make based on your sales, not your profits. In the UK, the fees average around 9%.

The royalty fees last the length of your signed agreement. If you exit the arrangement early, a franchisor may require you to continue making royalty payments.

Generally, there is also a marketing fee, which is the franchisee's required contribution of around 2.5% towards the company's advertising budget. By pooling money, each franchisee benefits from the company's professional ad campaigns that increase the chain's brand recognition.

One of the most overlooked financial aspects of opening a franchise is the working capital. Working capital is the money you have available to purchase needed items and services for your business to keep it afloat. 

3. Length of the Agreement and its Requirements

The franchise agreement is an official commercial contract, so you should treat it carefully. Always have legal representation review it before you sign. One of the things your attorney will pay attention to is the length of the contract.

The length of your franchise agreement can greatly impact your finances. For example, as mentioned, you could be required to continue paying royalty fees if you leave your agreement before its expiration date.

The standard agreement is for five years. It usually has a built-in renewal process that works as long as the franchisor doesn't have legal grounds to terminate the arrangement.

Pay close attention to the agreement's requirements. You don't want to violate any of them, giving the franchisor the option to end the relationship. Termination could jeopardize your overall finances. This is especially so if termination occurs before you've had a chance to recoup your initial investment.