What are franchise fees? Why you pay & what you receive
What they are
Franchise fees enable you, the franchisee, to access the franchisor’s business blueprint. For the fees you pay, you’ll be able to own and run a franchise using the franchisor’s business model.
There are several franchise fees customarily paid by franchisees. According to SBA.gov, these include:
- Initial franchise fee: Think of the initial franchise fee as the purchase of a license to own and run a franchise business, including the franchisor’s business systems and support. This is a one-time fee and should not be confused with the entire cost of your initial investment which can be significantly more than the franchise fee as it includes a series of expenses associated with opening a new business such as the outlay for real estate and inventory.
- National and local marketing fees: Franchisors market their brands, often at considerable expense. They seek to reach a broad range of consumers through multiple marketing platforms to benefit the franchise overall. Franchisees reap advantages from these marketing efforts and therefore are required to pay fees. Usually represented as a percentage of revenue, an ongoing fee of 2% is typical.
- Royalties: Another ongoing fee, royalties allow for the ongoing use of the franchisor’s business model and support. It’s commonly between 4% to 12% of your revenue depending on the brand.
Technology fees: Some franchisors have proprietary software for operating their businesses. Franchisees pay an ongoing fee to purchase and license that software.
What they pay for
As a potential franchisee, it’s common to wonder what the franchise fees are for. In a nutshell, franchise fees are for the one-time startup costs to own and run a franchise business, as well as the ongoing maintenance of the franchisor/franchisee relationship.
Some industries within franchising have higher or lower fees. Businesses with higher annual revenues, like high volume food franchises, may charge lower royalties because the revenues are so high. Conversely, smaller businesses may charge higher royalties because the annual revenue is lower.
Other franchises may offer low initial franchise fees as an enticement to potential franchisees and to remain competitive with other brands. Some franchisors are interested only in attracting more sophisticated franchisees, so the initial franchise fees are high.
What you get in return
As the saying goes, “you get what you pay for.” These initial and ongoing fees are essential to the successful operation of your business. In exchange for paying the franchise fees, you receive:
- Initial training: Offered as a combination of classroom, online, and in-store or on-the-job, training includes all you, and your team, need to know to run the business.
- Marketing: Your franchisor invests in marketing the brand you and many other franchisees own. Marketing boosts recognizability, reputation, and reaches a broad consumer base. This translates to customers walking through your door and increasing revenues.
- Ongoing support: Your royalty fees pay for the ongoing support you’ll need to stay on top of your business. Franchisors are constantly reinvesting in the brand to further the development of products and services, and update marketing strategies and technology.
And while the details of every franchise agreement may be different, you can count on finding franchise fees that are fixed, standard, and non-negotiable. Once you’ve signed a franchise agreement, failure to pay the franchise fees can possibly result in legal action and the loss of your business. Understanding what franchise fees are and how you benefit from them is an important component of the franchise discovery process.
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