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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.

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.

franchise investment

Understanding The Franchise Investment Path

You’ve found a franchise that you could imagine yourself running.  You’ve envisioned yourself passing along your business card with the word “owner” nestled beneath your name. You may have even spent time in the mirror where you practice saying, “Why yes, this is my business.” After all, practice makes perfect. But before you submit your request for consideration to the company of your choice, you’ll need to count some Benjamins…

As a potential franchisee, it’s important to consider how much you’ve got, how much you’ll have to give upfront, and how much your franchisor will get as time goes on.

Know your worth, your net worth that is. Using a balance sheet, make a list of all your assets: checking accounts, savings accounts, real estate, automobiles, stocks, bonds, any mint-condition Beanie Babies you may have acquired in the late nineties, and of course cash on hand. Next subtract your liabilities, meaning everything you owe or pay: mortgages, bills, and outstanding loans of any kind (student, automotive, or otherwise). The number you’re left with is your net worth. Now identify your liquid capital. This refers to your assets that are readily available to start your business such as CDs, cash, stocks, or bonds. A franchise will have a minimum requirement for liquid capital and/or net worth. Why? These financial statements serve as proof that you can get a franchise off the ground.

Decide whether or not you can afford the franchise fee and investment.  The franchise fee varies greatly depending on what industry you’re getting into. Some fees are as little as five-thousand dollars where others may be in the neighborhood of one-million dollars. You have to decide what works for you. Look at your franchise fee as membership dues that all franchise business owners pay to get their businesses off the ground. This one-time payment often includes training, support, and guidance regarding the physical location of your business. It is enormously important that understand exactly what your franchise fee entitles you to so read all of the fine print. (Twice if need be.) Your investment represents what the company believes it will cost you to get the business started. Costs may include rent, hiring costs, supplies, inventory, insurance, and more depending on the type of business you’re opening. While it’s in the company’s best interest to accurately depict how much your initial and ongoing financial contributions will be, it’s in your best interest to get a second opinion, and third, and fourth. Utilize online message boards. Since they’re anonymous, you’ll get insight you wouldn’t otherwise get from an employee who may think twice about sharing one-off incidents of money pit-itis.

On going, going, going, royalty fees.  Long after your franchise fee and investment costs are paid, you will still be required to pay royalty fees. This is the percentage of your gross profits (before any deductions are made) that will go back to your franchisor as long as you own your business or until a zombie apocalypse, whichever comes first. Before you balk and say, “But this is my money!” remember that a great deal of your success stems from the fact that the business you are running is in fact a franchise. You were provided with a proven model and method to achieve business success. In some instances, additional royalties for profit-generating initiatives such as marketing and advertising are collected. (Those celebrity endorsements and Super Bowl advertisements aren’t going to pay for themselves.)

In summary, you have to know your wealth before you grow your wealth. The franchise you chose to invest in is designed to help you succeed.  Help yourself by accurately detailing your financial status and choosing the franchise that best suits you.

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.