Franchise Fee 101: All You Need To Know
Are you interested in opening a store or eatery as part of a franchise? You will need to learn all about franchise fees and the typical franchise agreement. Generally, a franchise fee is what you would owe to the franchisor to take part in running the franchise brand and operating through their system.
In the tutorial below, you can learn about the typical amount a franchisee must pay, whether you can negotiate franchise fees and the difference between initial fees and ongoing fees. You should understand franchise agreements give people certain rights, but they also have legal responsibilities to follow the operations manual.
Are you ready to learn all about franchise fees? Let’s get started!
Don’t have time to read this full article? Here’s a quick summary:
- A franchise fee is what you would owe to the franchisor to take part in running the franchise brand and operating through their system.
- The typical types of franchise fees include: initial fee, ongoing fees and royalties (usually paid monthly), periodic marketing fee, audit costs, insurance, initial training, and technology fees.
- The purpose of the franchise fee is to gain access to many features of the national brand company including formal training; branding help; advertising assistance and marketing templates; access to the operating manual; technology and software access; general support; etc.
- Franchisors calculate both the ongoing marketing fees and royalty fees using monthly gross revenue percentages.
- An initial franchise fee allows you as a Franchisee to open up your business based on a national brand – it covers everything needed for set-up including license ownership costs.
What Is a Franchise Fee?
So, what is a franchise fee? Essentially, a franchise fee refers to the money or royalty fee the franchisee pays the franchisor to operate a franchise company. The Federal Trade Commission (FTC) regulates the franchise system nationwide. The federal trade commission considers it as the initial fee.
The initial fee involves the costs of goods and services the franchisor sends before the franchisee opens a new business. The fee also pays for intellectual property licenses and trademarks, including the brand name, logo, and products or services.
The typical types of franchise fees include:
- The initial fee
- Ongoing fees and royalties; usually paid monthly
- Periodic marketing fee
Other franchising fees may include audit costs, insurance, initial training, and technology fees.
What Is the Purpose of a Franchise Fee?
The purpose of the franchise fee and signing of the franchise agreement is to gain access to many features of the national brand company. The features you can get when buying a franchise include:
- Formal training
- Branding help
- Advertising assistance and marketing templates
- Access to the operating manual
- Technology and software access
- General support
- Access to the brand’s internal business systems
- Entry into the franchisee network
Ongoing franchise fees also include covering the costs of the national marketing budget for the brand. Some other aspects that the fees cover include audits and insurance. You can expect to pay an average of about $35,000 for the initial fee.
How Is the Franchise Fee Calculated?
Typically, franchise fees range from around $20,000 to $50,000 as long as you haven’t purchased a Master Franchise. However, some companies have lower fees. For instance, the Subway franchise fee is $15,000 while the Chik fil A initial fee is $10,000.
Master Franchises, however, require the purchase of a large piece of land and selling individual franchises in that location. As such, Master Franchises can cost an initial franchise fee of $100,000 or more.
Franchisors calculate both the ongoing marketing fees and royalty fees using the monthly gross revenue of a business. Also, they use percentages of the revenue to calculate the fees. You can find the details of these calculations in the franchise disclosure document.
What Is an Initial Franchise Fee?
An initial franchise fee is the cost of entry to gain access to the business systems and other features of the proprietary company. Essentially, the initial fee allows the franchisee to open up his or her business based on the national brand.
The fee covers everything needed to set up the business and open it to customers. After paying the initial cost, you get the license to own and operate the franchised store, restaurant, or other business. You can think of the initial upfront franchise fee as a one-time upfront payment that ensures you can open for business.
Are you wondering whether a particular national company is worth the franchise fee? You may want to speak with other franchised company owners to see how well their businesses operate. Find out about the monthly revenue.
What Are Ongoing Franchise Fees?
Ongoing franchise fees include initial advertising and ongoing marketing fees, royalty fees, and branding costs. The franchisee agrees to pay the royalties to gain greater support from the main franchisor. Usually, the royalty fee is based on a percentage of the gross revenue.
Therefore, as the franchisee business makes more money, the royalty fee increases. Usually, these fees range from about 5 percent to 10 percent of the gross revenue. The marketing costs involve putting money toward the national marketing budget for the franchised business.
You will have national brand recognition and brand loyalty. That ensures more customers make it into your business.
What Are Typical Franchise Marketing Fees?
Each company has specific franchising fee options it adopts, so you may not see any standardized costs. However, there are more common and average costs associated with franchising a business. On average, franchise fees range from about $25,000 to $50,000. However, these costs can get much lower or greater depending on the company you pick.
You will also need to budget for ongoing payments like technology costs, marketing/advertising fees, and royalties. Also, consider the price of a franchise attorney since a franchise lawyer can help you review the franchise agreement and franchise disclosure document before you sign.
Are Franchise Agreement Fees Negotiable?
Are franchise fees negotiable? Usually, franchise fees are not negotiable. One of the reasons is due to rules from the Federal Trade Commission, which state that any changes given to one franchisee must adhere to all prospective franchisees. Most franchises will not provide you with a discount to avoid having to give the same discount to others.
Amending the typical franchise agreement is not preferred among most national, name-brand companies. When all fees remain the same among franchisees, the proprietary business can collect the funds easily.
Negotiating the franchise fees provides less consistency and uniformity for each business. It may even lead to a drop in the success of the national brand.
Do Franchise Fees Affect Profitability?
Since franchise fees often cover the costs of marketing and advertising, they may improve profitability by bringing in more customers and greater overall revenue for a small business. Royalty fees also improve the franchisor’s profits along with increasing the ability to expand and gain new franchisee recruits.
If you’re wondering how the franchise fees impact profitability, speak with a current franchisee in the same company. Find out about the average monthly revenue and their ability to pay ongoing franchise fees. Ask whether they are still making a good profit after paying these fees.
What Happens If You Can’t Afford to Pay Ongoing Franchise Fees?
If you miss payments outlined in your franchise agreement, you could end up in breach of the legal document. As such, you might have legal outcomes. Further, your franchisor may terminate your entire franchise if you miss these payments.
If you can’t pay ongoing royalty fees or advertising costs, you may face financial losses and the franchisor may not provide you with any further support.
Speak with a lawyer to learn all of your options in case you’re having trouble paying ongoing franchise fees. You may also want to speak with the franchisor and explain your financial problems. You may get a franchisor who will suspend payments until your revenue increases and you can resume paying the costs.
If you are interested in opening up your own franchise, you should now understand the initial franchise fees and ongoing costs. You will likely need a minimum of $20,000 extra funds available before opening up a franchise business. Sometimes, you’ll need as much as $50,000.
Yet, if you can cover the costs of royalty fees, marketing prices, and more, you will soon open up a successful franchise.