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Franchise Funding: Building & Maintaining Your Success

There are many factors that show a franchise to be successful. For Home Instead’s franchisees, this means becoming a key part of the community, having a bank of positive client testimonials, and of course, being financially sound.

Many Home Instead franchisees started at humble beginnings and now turn over £1m a year, with many making much more than that. They have given full consideration to the financial aspects of running a franchise right from the beginning and made a huge success out of it.

Getting funding

A home care franchise can only get off the ground if the franchisee has the necessary funds to make the initial investment. For many, this will mean getting a loan. There are various options to secure a loan, but whatever route you take, ensure that you have a clear business plan.

A business plan is your way of proving you can pay the loan back. It should clearly set out what your company aims to achieve, an analysis of the market and competitors, your marketing strategy, financial projections, and business goals. Make it easy to follow to keep the investor engaged as they consider it.

The avenues you can take to get a loan include:

  • A bank loan: some banks and lenders are open to hearing from aspiring business owners looking for finance to get the ball rolling. Very often, banks will want collateral in exchange for the loan, which could be property, a vehicle, inventory and accounts receivable. The good news is that banks often view franchises favourably due to their higher success rates in comparison to start-ups.
  • A franchisor loan: the franchisor itself might offer loans to people keen to come onboard. Usually they come with higher interest rates, so assess how it compares with getting a bank loan, along with repayment terms and potential late payment penalties.
  • A government start-up loan: you can apply for a government-backed loan of £500-£25,000 to fund a start-up. The amount you can borrow is normally limited compared to a bank loan and it has a strict eligibility criteria, but you don’t need as much collateral and the interest rates are lower.

Making the initial investment

When searching for a franchise opportunity you’ll probably hear the mention of a franchise fee. It’s a one-off payment that you’ll pay to begin their operations under the brand’s name. It means that you can receive the training and support that was promised to you when you first made the enquiry. You’ll need to show evidence that you can pay it before buying the franchise, so don’t forget to account for this when you weigh up affordability.

Another key consideration is the physical resources required to get the business started. Inventory, equipment, initial marketing; there will be a whole host of things you’ll need before day one of trading. Work out what the initial costings would be before you make the investment.

Paying the ongoing fees

Most franchises require an ongoing royalty fee, which for Home Instead is 6.5%+VAT of monthly turnover. For our franchisees, paying the royalty fee means being able to continue reaping the benefits of an established brand, utilising our market-leading support and being part of a large peer support network.

Breaking even and managing cashflow

A franchisee should continually look at financial forecasting, and you can only accurately do that by knowing when the breakeven point is. Anything beyond this point is profit and is an indication of financial success.

When working out the breakeven point, you first need to work out your fixed costs; that means costs that don’t change regardless of how much is produced or sold, such as rent, salaries and insurance. This is figure one.

Take away the selling price per unit from the variable cost per unit; that means the costs that fluctuate based on the level of goods or services produced, such as raw materials and shipping. This is figure two.

Now divide figure one by figure two, and you’re left with the number of units you need to sell to break even. Sales that surpass this point generate profit for the business.

Knowing the breakeven point is just the starting point to maintaining profitability. It’s vital that you put measures in place to manage cash flow. That includes:

  • Keep the books balanced: ensure timely payments for both fixed and variable costs and keep a close eye on client payments, chasing up if needed.
  • Diversify revenue streams: don’t just rely on one product or service to bring in your income, as demand might reduce. Introduce new ones. For example, Home Instead franchise offices begin by offering  companionship care, before introducing a whole host of other services, such as specialist dementia andParkinson’s care. It means they can tap into a new market and reap its financial benefits.
  • Keep abreast of market conditions: there might be certain economic conditions affecting your profitability, such as tariffs and tax rises. Account for this when you’re budgeting.

Getting insurance

Another cost consideration is insurance, which not only protects you from financial loss but also ensures that you’re legally compliant. The types of insurance that are a must for franchisees include:

  • Liability insurance: this protects you from a variety of claims, including clients or employees suffering from an injury at the business’ premises or while on shift. Liability insurance covers the medical costs and legal fees because of the incident. 
  • Property insurance: this covers the franchisee for damage to its physical assets, including the building, inventory, equipment, and signage. This policy covers damages from events like fires, theft, vandalism, or natural disasters. In many cases, franchisees will need to purchase property insurance to meet the terms of their lease or the franchise agreement.

Insurance is what protects you from risk. Effectively managing risk all comes down to a sound contingency plan that accounts for unexpected expenses. You should identify all potential risks and assess how likely and severe they are if they were to occur.

Considering the tax implications

When accounting for overheads, franchisees should consider the tax obligations that they need to fulfil. This includes:

  • VAT: Any business with a taxable turnover that exceeds the current VAT threshold (currently £90,000 a year) should register for VAT with HMRC and charge VAT on sales. It also means being able to claim VAT back on eligible purchases through your VAT return for that accounting period.
  • Corporate tax: operating as a limited company means being subject to corporation tax of 25% on your profits of over £250,000.
  • Payroll taxes: it’s not only the employee, but also the employer eligible to pay tax on the staff wages. Employers must pay National Insurance of 13.8% for employees that earn £9,100 a year.

Some limited companies can get tax relief if they or their activities fall into a certain category. The Gov.UK website provides guidance on this. 

Managing tax effectively all comes down to using a reputable accountant who can ensure you’re paying the right amount of tax and complying with business legislation.

Reporting on finance

As a franchisee, you’ll work with the franchisor to optimise financial business success. This will mean providing regular financial reports that demonstrate how your business is performing.

A good way of determining success is by comparing budget reports with actual reports. This enables you to look at whether you have achieved what you forecasted, taking into account gross margin, net profit, and return on investment (ROI).

Putting together an exit strategy

It might seem odd to think about selling the business when you’ve just established it, but it’s crucial to consider your exit strategy from the start to get the most out of your journey as a franchisee. For many business owners, the time comes to sell the business when they retire, or when they simply want to explore pastures new.

The financial performance of your business affects its market value when the time comes to sell it. So do themarket conditions, including the demand for your product or service and its market share.

When looking to sell, it’s recommended to work with a brokerage firm to value your business and ensure the transaction goes through while complying with all legal and financial requirements. Home Instead is the only home care company to have its own brokerage firm H.I. Resales, which has significantly reduced the stress involved for our franchisees looking to pass their business on to a safe pair of hands.

Funding a franchise to realise your business dream

Being a Home Instead franchisee, particularly at the beginning, means managing several business functions: recruitment, HR, marketing… and crucially, finance. Don’t underestimate your ability as a finance manager; our national office team will stand you in excellent stead to get your business off to a strong financial start.

Get started

Our Franchise Development Manager, Luke Spellman, will fill you in on everything you need to know. Book a call with him here.