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.