What you get in exchange for your franchise fee
Joining a franchise requires you to pay a franchise fee, but do you really know why you pay it and what you get in return?
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What is a franchise fee?
A franchise fee is a sum of money that you pay to a franchiser to become a franchisee of the business. It gives you the right to operate your branch of the business using its brand name; access its systems, operations and training; and benefit from ongoing support to help you make your new endeavor successful.
A franchise fee can be anywhere from $3,500 to more than $40,000, and this is not the only fee you will need to pay to join the business. You will also have to pay a regular royalty fee on your revenue.
The key difference is that a franchise fee is paid upon signing the franchise agreement, while royalty payments are made once the business becomes operational.
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What other fees may be payable?
All franchises are different, and it's worth checking with your chosen franchiser about what other fees you will incur before signing the franchise agreement as hidden costs and unexpected bills can cripple you financially.
Some franchises might require you to contribute toward the cost of marketing, and you may need to pay a renewal fee at intervals to renew your contract when the initial term concludes. If your contract is short, you will need to plan early to budget for this cost.
You may also be required to fund the costs of equipping your business property, buy specific equipment or software, commit to a monthly minimum stock order from specific suppliers (limiting competition also means no opportunity to negotiate on price), buy uniforms for your workforce and fund their training, and pay business and property insurance. These costs all come on top of the accounting, HR, cleaning and legal costs that you probably expect to pay.
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Read the franchise agreement carefully
Franchise fees will be clearly stated in the franchise agreement as this forms the basis of the legally binding agreement between you and your franchiser. The agreement should explain how fees are calculated; when they must be paid; the consequences of late payment; notice periods to increase fees; what you get for free and what you must fund; and how to renew, terminate or sell your business at the end of the initial contract period.
You may also be privy to a financial disclosure document that will help you perform due diligence and develop a better understanding of the costs you will likely incur if you join that franchise.
Never sign without seeking personalized advice from a franchise attorney. You might also wish to work with a financial advisor to ensure you will take on the business with a sound financial footing and a solid plan for success.