Franchise finance in Australia: what it costs to buy in

Buying a franchise in Australia usually costs far more than the franchise fee suggests. A food franchise commonly totals $400,000 to $900,000 once the fee, fit-out, equipment, stock and working capital are counted. A service or mobile franchise can be $50,000 to $150,000. The fee itself is rarely more than a fifth of it.

What does buying a franchise actually cost?

There are four costs, and they need to be planned separately because each is funded differently.

A quick service food franchise in a shopping centre sits at the top of those ranges. A coffee franchise typically lands at $250,000 to $500,000. A mobile or home-based service franchise, with a vehicle and equipment rather than a tenancy, can be under $150,000.

The initial fee buys you the licence to operate under the brand, the initial training, and the territory. It buys no physical asset, which is exactly why it is the hardest part to finance: there is nothing for a lender to secure against.

Why does the franchise agreement term matter so much?

This is the mechanic most first-time franchisees do not see coming, and it affects your monthly repayment more than the interest rate will.

Lenders will not usually lend beyond the remaining term of your franchise agreement. The logic is straightforward: if the agreement ends in five years and is not renewed, the business that services the loan stops existing.

So a five year franchise agreement generally means a five year loan, even on a $500,000 fit-out that would comfortably support a ten year term in any other business.

Consider $400,000 borrowed at the same rate:

• Over 5 years, the repayment is roughly double what it is over 10.
• Over 10 years, the total interest is higher but the monthly cash demand is far lower.

The franchise structure forces you into the first column. That is not a reason to avoid franchising, but it is a reason to model your cash flow on the actual term available rather than on what the same borrowing would look like elsewhere.

Two things soften it. Some lenders will count renewal options toward the term where the agreement grants them and the franchisor confirms them. And some franchise systems have negotiated longer terms with particular lenders. Both are worth asking about explicitly.

How much deposit do you need?

Generally 30 to 50 per cent of the total project cost.

The range moves on three things:

The brand's data. Established systems with hundreds of outlets and years of consistent unit-level performance are assessed on that evidence. New or small systems are assessed on a forecast, which requires more of your money.

What you are buying. A new site build is riskier than buying an existing franchised outlet with two years of trading history. Resales are often financed on better terms for exactly this reason.

Your security position. Franchisees offering property security can borrow a larger share. Without it, expect the higher end of the deposit range.

Where the deposit range genuinely improves is on well-known systems where lenders have accreditation arrangements in place. That can move the borrowing proportion meaningfully. It is also where it pays to check whether the panel is actually competitive, which we cover in more detail separately.

Why does working capital get left out?

Because the franchisor's disclosure document sets out the establishment costs, and people read that as the total.

A new outlet does not open at mature revenue. It ramps, often over six to twelve months. During that period you are paying full rent, full wages, the marketing levy and royalties on whatever revenue you do make, out of revenue that has not reached plan yet.

Royalties are worth understanding here. They are typically charged on gross revenue, not profit, which means they are payable in full during a slow ramp when your margins are thinnest.

A realistic working capital buffer is three to six months of fixed costs. For a food franchise with $25,000 a month of rent, wages and levies, that is $75,000 to $150,000 sitting available and not spent on the fit-out.

The right product for it is a revolving facility such as an overdraft or line of credit, drawn only as needed, rather than borrowing it as a lump sum you start repaying immediately.

What should you ask before signing?

Beyond the financials, four questions that change the finance picture:

1. What is the term, and what renewal rights do I have? This sets your loan term.
2. Who owns the fit-out at the end? In many systems, improvements to the premises do not come with you.
3. What are the mandated refurbishment obligations? Many agreements require a full refit at a set point, often mid-term. That is a second capital event you need to plan and fund.
4. What are the actual unit economics of comparable outlets? Not the system average. The comparable ones: same format, same size, similar location type.

The refurbishment obligation catches people. Being contractually required to spend $150,000 refitting in year five, while still repaying the original fit-out loan, is a genuinely difficult position and an entirely predictable one.

Which products fund which part?

Splitting the project across products rather than taking one loan for everything is what keeps the cost down.

• Equipment goes on asset finance. It is identifiable and resaleable, so it prices best.
• Fit-out and construction goes on a business term loan. Mostly not securable, so it prices higher.
• The franchise fee goes on a term loan or your own funds. Nothing to secure against at all.
• Working capital goes on a revolving facility, sized to your ramp.

One $600,000 unsecured loan covering all four is simpler and materially more expensive than four facilities matched to what they are funding.

General information only - it doesn't take your situation into account. Consider whether a product suits your business before acting, and get independent advice where you need it. No credit check to see your options. A credit check only happens if you choose to formally proceed with a lender.