Franchise Fees Explained
Franchisees Make Several Types of Payments to Franchisors
Franchising means that a franchisee is buying a proven system, one that's been honed and tested and is full of best practices. It's the equivalent of a corporation bringing in a consultant to help it launch its business. Beyond that, though, there are things the franchisor does on behalf of all its franchisees that cost money. And, the franchisor wants a little return on a consistent basis. Those scenarios make up the three types of fees that franchisees often pay to the franchisors. Obviously, specific systems can vary and many franchisors don't charge all three fees. Be sure to explore this area well before signing the franchise agreement. Also, know under what circumstances, and with what notice, the franchisor can change the fee structure.
The fees are:
- Franchise fee: The first fee that you pay to your franchisor while starting a franchise is the franchise fee. These can range widely, from as little as $10,000 to as much as $1 million. Factors that go into this are the type of industry, the brand worth, the expenses related to strating up the franchise. Support and training, including having someone from the franchisor come train employees may be included. So might items like advertising the franchise opening, some public relations efforts on behalf of the new franchisee and use of the logo and trademark. It also includes the propietary information on how to run the business. This is a one-time fee, unless the franchisee opts to open additional outlets.
- Royalties: This is paid to franchisors for using the business model, registered name, logo and patented products/services on a recurring basis. This provides the main source of income for the franchisor and can range from 3% and 8% of the gross sales for a fixed period of time. It can be taken on a monthly or quarterly basis or once in a year. Some franchisors may fix the percentage on net sales. The fee is also intended to cover on-going support the franchisor will provide its franchisees.
- Advertising: As the name suggests, this fee is for the marketing campaign the franchisor launches on behalf of the entire franchise chain. It can be anything to raise the brand awareness of the product or service. It may also include specific advertising in select markets. Some franchisors provide a kick-back, or pool to franchise its brand in certain markets. Others allow franchisees to take money from the pooled funds for its own advertising campaigns. (Obviously, these require approval from the franchisor on the front end.)
Again, these types of fees may vary, but a good franchisor will usually offer some variation of all three. If they don't, question why not. A franchisor that doesn't take royalties has to make its money somewhere. So make sure to know where. If its focus is on merely selling franchises, thereby collecting the franchise fee, continuing support may be weak. Likewise, a franchisor that doesn't cover national or regional advertising is doing little to help grow its brand. Obviously, in certain cases, this may work. But in others, it can spell disaster.
The key is to know what to expect and to make sure it's understood what and why where fees are concerned.
