Franchising can be a profitable business venture given the support and network that business owners gain access to through their agreement. But read the fine print first. Franchisees should account for all fees before entering into any formal arrangement.
Franchise fees are often complex and can be challenging to understand. Read on to understand the ins and outs of franchise fees so you can determine if it makes the franchise opportunity one you should go for or pass up.
What is a franchise fee?
This fee is the amount of money a franchisee pays a franchisor to use the company's trade name and take advantage of their marketing systems. A franchise company's size, market value, industry, startup costs for equipment and property, and the potential return on investment (ROI) all contribute to the company's franchise fee.
During the presale process, a franchisor will provide a franchise disclosure document (FDD), which outlines all details of the investment, including fees and earning potential. New franchisees should review this information thoroughly as the fee requirements are a very intricate process, and failure to adhere to these guidelines may result in the franchisee losing their license or even being sued, as established by the franchise agreement.
Franchise fees vary greatly, averaging $37,500 and ranging from nothing to above $100,000. A franchise fee payment of $0 is not an industry standard. In fact, the Federal Trade Commission (FTC) stipulates that businesses must satisfy three requirements to be considered a franchise, including making a minimum payment of at least $500 during the first six months of operations.
Initial vs. ongoing franchise fee
The initial fee is the base cost that a franchisee pays to access benefits or business systems. However, this is only the entry fee. Prospective franchisees should note that the upfront costs as well as the ongoing expenses that you will need to satisfy to maintain adherence to your franchise agreement.
Initial franchise fee
Every franchise opportunity requires a franchisee to pay some amount of money before opening their business, and most require a franchise fee. In a new agreement, a franchisee can typically expect the franchise fee to cover the following:
- Initial training: Each franchise has processes and business systems, and you and your team will need to receive training to ensure your franchise business matches the branding in other locations. Some franchisors will cover the costs of training, travel, and supplies while others may offer reimbursement. As your business grows, your franchisor may assist with recruitment support in addition to providing you with training assistance.
- Marketing tools: As a new business, you will need everything from software to business cards to promote your business. Good franchisors will supply you with tools to ensure you can meet the marketing demands of your launch. They will often promote the grand opening of your store to a larger audience as brand-level, national news.
- Building Selection, Site Build-Out, and Renovation Assistance: The idea of a franchise is that no matter where you are in the world, a customer should be able to enter any store and have the same quality experience. A big part of that experience is location. Your initial franchise fee will also go toward helping you find a building or site for construction. Your franchisor may be able to help you negotiate your lease on a prime piece of real estate.
Ongoing franchise fee
After the initial fees, franchisees can expect to pay ongoing fees. The specific costs may vary amongst franchises, but the most common are for national advertising campaigns and royalty expenses.
- Royalty fee: One of a franchisor’s primary sources of income is royalty fee payments. Franchisees pay a quarterly or monthly membership fee to remain a part of the franchise enterprise. This fee is usually a variable amount that your franchisor calculates as a percentage of your gross sales. Other agreements may require that a franchisee make royalty payments in a fixed amount no matter how much money the business earns. Typical royalty fees average 5-6% but may be as low as 1% or as high as 50% or more.
- Advertising fee: The other typical ongoing fee covers marketing, also known as the advertising fund. The money is pooled from all franchisees to support franchise-wide advertising strategies and ad placements, often on a national scale. Advertising fees may also be a percentage of your gross revenue or a set amount, but they’re generally less than royalty fees, around 3-5%. As business owners, franchisees have the option to lead in-house advertising efforts. If so, you may be eligible for reimbursement.
Exceptions to the franchise fee
Generally, franchise fees are non-negotiable, but there are some circumstances where a franchisor may adjust their cost, including:
When franchise owners open more than one location, they may become eligible for a discount on additional sites as an incentive. This a reciprocal benefit to both parties, as the franchisee receives a reduced fee, and the franchisor furthers its reach and brand.
At the end of a franchise agreement term, both parties have the option to renew the arrangement. Instead of paying another franchise fee at the full amount, franchisees are usually given a discount or only required to pay a portion of the standard franchise fee.
If a franchisee purchases a franchise business from another franchisee, they are responsible for paying a transfer fee. A transfer fee may be a fixed amount or percentage of the original franchise fee.
Profits over fees
While franchises do provide business support for those looking to become self-employed, they can be costly in the beginning. With Main Street, entrepreneurs don’t have to pay the $30,000-plus fees of franchises.
To get started, you pay less than $10,000 — and that’s not a franchise fee. Instead, it’s an investment in your business. The best aspect of Main Street’s model is that the money you spend goes back into your company, versus paying for a brand or likeness. Instead, you'll learn how to develop the marketing narrative for your business and work one on one with our experts to build a brand identity that captures your company and attracts your customers.
In the traditional franchise system, business owners matriculate through a uniform training process. Main Street, however, provides you with guidance from day one, giving you access to training, resources, and a success toolkit. You still have room to create your own brand and put your unique spin on your company.
Waive the franchise fee goodbye
Business owners need to evaluate all the costs associated with business ownership to see where they’ll have the most value. That value can be in potential profits, training, resources, likelihood of success, and more. Those who want the feel of big-name appeal should further explore franchise opportunities. Entrepreneurs who want 100% of their investment to go into their own business should consider Main Street.
To learn more about the Main Street development program and how we can help you avoid a franchise fee, apply online.