What Are Franchise Fees? Initial, Royalty, Marketing, & More
Michael Nicholas / Franchising / May 1, 2023
Imagine you’re an entrepreneur who wants to start a business. You have a clear vision of where you want to be — the destination is in sight. However, to get there, you must cross a river. You are faced with a choice: swim across the rough waters or pay a toll to cross the bridge and reach your destination more quickly and easily.
Franchises are just like that toll, providing a shortcut to a successful business. Like the fee you pay to use the bridge, franchise fees enable you to leverage a proven business model and brand name when starting a franchise. In this blog post, we will dive into the world of franchise fees, look at what those expenses will get you, and help you decide whether they are a worthwhile investment.
A franchise fee is a payment that a franchisee must make to a franchisor in order to obtain the right to use the franchisor’s brand name, trademarks, operating system, and other intellectual property. The franchise fee is typically paid upfront and can range from a few thousand dollars to hundreds of thousands of dollars, depending on various factors.
When we discuss the franchise fee as above, what we’re typically referring to is the initial franchise fee. However, the total investment costs needed to start and continue running a franchise are much more than the initial franchise fee. While this fee gets you in the door, there are other costs and expenses that a potential franchisee must consider when making a business plan.
Opening a franchise has many benefits over starting a company from scratch. The franchise fee is the price that franchisees pay for this head start. The initial franchise fee is usually paid upfront when the Franchise Agreement is signed. Some franchises may allow franchisees to pay this fee in installments over time.
If you’re considering purchasing a franchise, it’s essential that you fully understand the financial implications of the specific company you’re interested in working with. To learn more about a franchise’s costs, you’ll want to study the Franchise Disclosure Document (FDD) closely. This document will outline all the fees and expenses a franchisee should know of. By law, a franchisor must send the FDD 14 days before any agreements are signed or money is exchanged.
Let’s look closer at the initial franchise fee as well as other fees and costs you may expect.
The upfront fee that franchisees must pay to the franchisor is the initial franchise fee. This fee typically gives the franchisee the right to use the franchise’s branding, business model, and other intellectual property. The exact cost and what is included with a company’s initial franchise fee will be outlined in the FDD.
The other costs associated with starting and running a franchise include additional franchise fees as well as startup and ongoing costs.
In addition to the initial franchise fee, franchisees are often required to pay royalties to the franchisor. Royalties are often based on a percentage of sales. However, every franchise can organize this how they see fit. For example, some franchises charge a flat fee for royalties, and others may offer a lower royalty rate based on sales volume.
Considering one of the biggest perks of opening a franchise is the instant brand recognition that comes along with it, it’s not surprising that franchises charge marketing fees. These costs go towards marketing on a national or international level for the franchise brand as a whole. Marketing fees can also be based on a percentage of sales or a flat fee.
Technology fees cover costs associated with software or hardware that is necessary to run the business. This expense helps franchisors by giving them access to the tools the franchise has developed or utilized to help streamline business processes. It also allows franchisors to invest in developing new technology, benefitting the entire franchise.
The franchise fees outlined above are paid to the franchisor to cover the benefits that franchisees receive. However, they are not the only investment costs that a franchisee will face. There are additional expenses that go towards other aspects of starting a new business.
For example, it’s always a good idea to work with a franchise attorney when entering into buying a franchise. They will help you navigate the FDD and Franchise Agreement as well as understand all the fees. It might also be wise to work with a professional accountant. Other costs that hopeful franchisees should consider include startup costs. Consider building or construction expenses, real estate or leasing costs, insurance and taxes, and inventory purchases.
The franchise fee total can vary greatly depending on the franchise system, with some fees being relatively low and others reaching hundreds of thousands of dollars. The calculation of the franchise fee is typically determined by the franchisor and may be based on several factors, such as:
A well-established and successful franchise system may command a higher franchise fee than a newer or less well-known system. Meanwhile, a lesser-known new franchise may offer lower pricing to encourage franchisees to buy into the business.
Franchisors that provide extensive training to their franchisees may charge a higher franchise fee to cover these costs. In addition, the expenses involved for franchisors for long-term assistance may be factored into the royalty fee.
Franchisors may charge a higher franchise fee to cover the costs of developing and maintaining the brand, products, and services. This may also reflect the costs related to finding new franchisees, which helps with brand power.
Fees may vary based on the location and market potential of the franchise. For example, a franchise located in a high-traffic area or in a market with strong demand may command a higher franchise fee. Securing a protected territory may also result in a higher franchise fee.
Ultimately, the calculation of the franchise fee is at the discretion of the franchisor. While some franchisors may be open to negotiation, the majority operate using a boilerplate contract and won’t deviate from set pricing.
By paying the franchise fee, the franchisee is essentially buying into the franchisor’s established business model and brand and is granted the right to operate a business under the franchisor’s name and system. While the franchise fee can be a significant investment, it can also provide franchisees with a level of support and guidance that can be beneficial in starting and growing a successful business.
As mentioned, each franchise offers different specifics for the initial franchise fee, outlined in the FDD. Typically, a franchise fee will get you some or all of the following:
The average initial franchise fee can vary greatly depending on the franchise system and industry. Some franchise fees may be relatively low, ranging from a few thousand dollars to around $25,000, while others may be much higher, exceeding $100,000 or more.
There is such a significant range when looking at average franchise fees because of the vast array of businesses and industries you can buy into. Some require minimal training or equipment, while others require expensive build-outs or large inventories. In addition, some brands may be well known worldwide while others are just getting started.
As previously mentioned, the first place you’ll see the franchise fee laid out is the FDD. This document should also disclose any other financial information you need to know before entering a franchise agreement.
The FDD will list the exact cost of the initial franchise fee. In addition, the document should lay out the other expenses. While the initial franchise fee is typically given as a hard number, the additional expected costs are often given as low and high estimates. The FDD will also show the estimated total investment, including all fees and expenses — both the lower and higher end.
What percentage do franchises take?
The initial franchise fee is generally a one-time, flat fee. Franchises will likely also take a percentage of sales. These payments are made up of royalties and marketing fees, ranging from 2 to 15 percent.
Is a franchise fee refundable?
Franchise fees are generally not refundable, but some franchisors may offer a refund in certain circumstances.
What is the difference between the initial franchise fee and royalty fees?
The initial franchise fee is a one-time payment made to the franchisor for the right to use their brand and business system, while royalty fees are ongoing payments made as a percentage of revenue.
Do you pay a franchise fee every year?
Yes, franchisees typically pay ongoing fees to the franchisor, including royalty fees and possibly other fees like advertising fees or renewal fees.
Who pays the franchise fee?
The franchisee is responsible for paying the franchise fee to the franchisor. It may be possible for franchisees to use franchise business loans for all or part of the franchise fee.
Can you negotiate franchise fees?
Franchise fees are generally non-negotiable, but some franchisors may offer financing options or other incentives to help offset the costs. Those looking to open a second location may be more likely to successfully negotiate fees.
If large franchise fees are putting you off from opening a franchised business, opt for an opportunity that has a low initial franchise fee yet high earning potential.
One such business is P3 Cost Analysts, a cost reduction consulting franchise. This work-from-home company has a low buy-in with in-depth training and support, marketing assistance, and an expert helpline.
As a result, it’s a great opportunity to create a residual stream of income with little upfront investment and no limits on earning potential.
When you first start looking at potential franchises, these fees may be a little scary. However, it’s important to think about why you were considering a franchise in the first place. With the franchise fee, you can access that franchise’s brand name, trademark, business model, operating system, and more.
While these fees can vary greatly, the information needed to make an informed decision will be given to you upfront in the FDD. If high fees are a concern for you, there is always the option for choosing a franchise with reasonable buy-in fees, such as P3 Cost Analysts.
If you’re interested in starting a P3 Cost Analysts franchise, contact us today at 1-877-843-7579 or fill out the form on our franchising page, and we will answer any questions you have about the process and opportunity.
