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Financial Questions

The Franchise Fee In-Depth

When you sign an agreement with open a franchise, you’re probably going to be expected to pay a franchise fee. As you begin your search, learn the basics of franchise fees and prepare yourself for this necessary expenditure.

The nature of the franchise fee

The main thing that distinguishes the franchise fee from other payments you will make to the franchisor is that it is a one-time fixed fee. This is in contrast to other fees levied by the franchisor, such as royalty payments or advertising fees, which are generally recurring in nature and often calculated as a percentage.

Essentially, the franchise fee is like a membership fee for joining a club. It’s made when you first buy into a particular franchise system as a way to denote that you are now an authorized franchisee of this company. It gets you in the door, so to speak.

Also, while franchise fees are generally the same amount for all franchisees buying into the company, they vary drastically across industries and brands. For some simple service franchises, the franchise fee may only amount to a few thousand dollars. However, for more famous brands they can reach upwards of $100,000.

What you can expect to get in return for the franchise fee

The detailed explanation of what is covered by the franchise should be included somewhere in the franchise agreement, and actual specifics may differ depending upon the company. However, there are some standard elements of the franchise fee that you can expect any time you purchase a franchise.

Typically, paying the franchise fee allows you to use the franchisor’s brand and trademarks for the duration of the franchise agreement. Also, you will be allowed to use any proprietary processes and systems that make the company unique. These processes are often one of the most valuable parts of a franchise business.

Although it doesn’t apply in every case, many times the franchise fee will also give you access to special, pre-negotiated vendor pricing agreements, software platforms that are vital to running the business, equipment, and operational manuals. Sometimes, the franchise fee also helps to cover costs for your location’s grand opening event.

How is the amount of the franchise fee determined?

There is no set formula for determining the amount of a franchise fee, but in general, the more value the brand holds the higher the cost will be. Value, of course, is a qualitative attribute, but it often combines name recognition, built-in customer bases, the complexity of proprietary business systems, intellectual property, and more. The more of these qualities that the franchisor brings to the table, the more likely it is that they’ll be able to command a higher franchise fee.

Fitting the franchise fee into your budget

The franchise fee is only a small part of the total amount you are going to invest in a franchise business, but it can still have a significant impact in your choice of which company to partner with. Make sure that you research your options thoroughly so that you know what to expect, and assess how much you think you can afford to spend on a franchise fee as a part of your overall budget range.

Next Steps

If you’re considering a franchise investment or just have questions, feel free to contact one of our franchise specialists to learn more about the process and all the different franchise opportunities by completing our request form or calling 1-850-366-2394.

attributes

The Best Franchise Companies Share These Attributes

Searching for a franchise company involves hundreds of intricate considerations, and it’s a decision that requires enormous thought and analysis. While it’s too simplistic to say that there is a definitive set of attributes that makes a company a good fit for you, there are certain characteristics that many of the best franchise businesses exhibit on a daily basis.

They prioritize effective communication

One of the most astute things you can do during your franchise search is paying close attention to the communication habits of the various franchise representatives that you interview with. The tendencies they display during this phase are likely to continue should you move forward with the relationship, so think about how you want your prospective business partner to communicate.

Are they prompt with responses and forthcoming in terms of detail, or do they make you work hard to get any little snippet of information? Do they help you find the answers you are looking for, or do they leave you flailing in the wind to figure things out on your own? Successful franchise companies understand that effective communication is a crucial part of their organizational foundation.

They maintain integrity in all interactions

Integrity means so many different things in business. It means that the corporate representatives don’t have anything to hide. It indicates that when things get difficult, they won’t go looking for a quick, and possibly legally dubious, fix. It means that the company has actual value to provide and that it isn’t interested in duping people out of their money or time. It shows that the franchisor treats all of the people involved in the business, including the employees, customers, vendor partners, and franchises as human beings.

They look for long-term partners

Not every endeavor is going to work out, of course, but one thing that sets high-quality franchise companies apart is that the look for franchisees they can build long-term partnerships with. These are the kinds of franchise owners who become even more invested in the company ecosystem over time, and continually educate themselves about the company’s values and culture. A successful franchisor prizes these types of relationships with their franchisees and looks for partners they can trust to help grow the business.

They have stable leadership at the top

Maintaining stable leadership doesn’t equate with having the exact same executive team together for a certain number of years. New opportunities are going to arise and people will inevitably want to pursue them. What it does mean, is that the company should largely be free of organizational turmoil surrounding leadership changes. No business is perfect, and sometimes mistakes happen that need to be rectified. But what should trouble you is noticing a defined pattern of instability in the highest echelons of the company.

They value their customers

You can generally view a company’s ethos towards its customers as a microcosm of its relationships in general. If the company culture is built around disdain for the customer, then this feeling will infiltrate other areas of the business as well. On the other hand, if respect and value for the relationship between the customer and brand are built into the company’s fabric, then it’s likely that they approach every relationship with this same level of respect and decency.

Next Steps

If you’re considering a franchise investment or just have questions, feel free to contact one of our franchise specialists to learn more about the process and all the different franchise opportunities by completing our request form or calling 1-877-650-5551.

Franchisor Fees

Understanding Franchisor Fees

There are many incredible benefits to investing in a franchise business, but those benefits do not come without their costs. From up-front fees to payments that are tied to specific timetables or events, most franchisors have several different fees that they request to support the resources used by the corporate company on behalf of the franchisee.

It’s important to keep in mind that this is by no means an exhaustive list of any charges they franchisor may levy on the franchisee. Any franchise agreement must be carefully reviewed to illuminate any fees that will be charged, as well as what the franchisee will receive in accordance with said fees.

Start-up franchise fee

Most people with a passing knowledge of the franchise model are aware of the start-up franchise fee. This payment is typically made by the franchisee to the franchisor at the time that the agreement is finalized and the franchise license is granted. More often than not, this initial fee is made as a one-time, lump-sum payment, although it can sometimes take other forms.

Generally, the start-up franchise fee is made to the franchisor in return for a commitment to supplying the goods, processes, and intangibles that the franchisee will need to get the business operational. This can include things such as:

  • Branded materials
  • Proprietary equipment
  • Site identification expertise
  • Recruiting tools
  • Training manuals

Initial franchise fees vary from brand to brand, and the amount is usually determined by the extent of the capital commitment from the franchisor to the franchisee.

Brand license fees/royalties

Many, although not all franchisors, will also assess royalty fees to each of their various franchisees. These royalty fees are also known as brand license fees, and they are ongoing payments made by the franchisee on a pre-determined schedule, most likely quarterly or annually.

Royalty fees can take many different forms and be configured in multiple different ways, so it’s vital for any prospective franchisee to carefully examine the section of the agreement that outlines on-going payments and compare them with comparable franchises. They are often calculated as a percentage of gross revenue, but some companies choose to mandate an additional mark-up on each product sold that gets set aside for the franchisor. Additionally, they can be set at a fixed percentage, or the percentage may fluctuate to account for seasonal periods, market fluctuations, or other phenomena.

Advertising/marketing fees

Franchisees benefit significantly from the regional, national, or even global advertising apparatus of the parent company, so it’s not a surprise that they’re asked to offset some of the associated costs. Advertising fees are most often assessed as a percentage of sales, similar to royalty payments, but they can also be charged as a specified amount. It’s important for franchisees to remember that for most companies these fees go directly to the national or regional advertising costs, and franchisees are expected to cover any local advertising needs on their own.

Additional considerations

The fees listed so far are the most common charges a franchisee can expect to encounter, but they are not the only ones. If the franchise agreement is a contract set for a specific period of time, the franchisor may assess a renewal fee should the franchisee opt to continue. In the event that a franchisee wishes to sell their business to someone, the franchisor may choose to levy a transfer fee as a part of the agreement. Additionally, franchisors may have stipulations to assess additional fees for situations such as new technology implementation, or retraining initiatives.

Next Steps

If you’re considering a franchise investment or just have questions, feel free to contact one of our franchise specialists to learn more about the process and all the different franchise opportunities by completing our request form or calling 1-877-650-5551.