Franchise Business Fees: What Exactly Are You Paying For?

Author: shawna@frantechmedia.com

Date: FEB 20th, 2013

Topic: Industry Experts

If you're interested in purchasing a franchise, you're probably already aware of the type of investment you'll need to make. You may be wondering, however, why franchise fees can be so expensive and what exactly are you paying for?

What is a Franchise Fee?

A franchise fee is essentially the price that the franchisee has to pay for using the franchiser's valuable trademark, brand name, patented operation system and business model. Franchise fees usually include a one-time initial fee, as well as an ongoing royalty fee that may be a flat fee or may represent a sales percentage every week or month. Franchise fees may also include an extra promotional fee that covers the cost of highly valuable regional or national advertising.

Franchise Fee Costs

Initial franchise fees can typically cost from $5,000 to $75,000 and beyond. The amount can depend upon a number of factors, including how much support and training the franchiser gives to its franchisees while they're getting the business up and running. Franchisee fees may also vary according to the value of the brand name itself, as well as the value of the territory. As a good rule of thumb, you can expect to pay a higher franchise fee for a successful established brand, particularly if it's nationally or internationally known.

How Much are Royalty Fees?

As with franchise fees, royalty feeds vary greatly depending upon the franchiser company and can total up to 20 percent of the gross sales revenue. Again, royalty fees are often assessed according to the level of training, support and services provided to the franchisee by the franchise company.

Franchisers that offer services such as 24/7 support and regional call centres will most likely charge a higher royalty fee in order to offset these administrative costs.

In some cases, franchisers prefer not to charge royalty fees; instead, they cover their administrative and operational costs by implementing fees in other areas of the business. Regardless of how the charges are implemented, it's important to remember that if a franchiser is deeply involved with the operational aspects of your franchise business, you'll need to pay for that extra help and support.

If you want to be a successful franchisee, you need to understand that franchisers have to implement royalties and franchise fees in order to make a profit themselves. By charging an ongoing royalty, a franchiser is showing a vested interest in the success of your franchise and, in return, will do anything to help you succeed, because success for you means success for your franchiser as well.