Access to franchisee capital
by
Norton Rose
Establishment costs for retail outlets can range between $200,000 and $600,000, with additional funding often needed fro working capital. It is not surprising that few corporations are able to expand at anywhere near the rate of a successful franchise chain.
Franchising not only funds network expansion, it can provide valuable initial cash flow for a franchisor. The initial franchise fees paid by franchisees on signing the franchise agreement can make a substantial positive contribution to the cash flow of the franchisor in the initial period, as the diagram below describes. It is possible for the franchisor’s cash inflow in the early years to exceed cash payments, providing a source of funds for further network development.
It is important that any initial cash surplus is used to fund the establishment costs of the network and build the system and the brand so that the flown of ongoing royalties is optimised, as the contribution of initial fees to cash flow benefits is not sustainable. To ensure the franchisor’s long term survival, ongoing royalties must not rise to exceed costs before the decline in initial fees (caused by market saturation for franchise opportunities).
See the buying a franchise and running a franchise pages for further assistance.
This article was created by Deacons and appears courtesy of Austrade . 26.06.2007
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Tel: 03 8686 6000
Fax: 03 8686 6505
