A franchise fee is the upfront fee that a franchisee must pay to the franchisor to use their brand, trademarks, and business systems. This initial franchise fee can be seen as the entry price into the franchise system, after which the franchisee gets to avail of all the benefits offered by being part of a large franchising group.

For the franchisor, this fee covers their responsibilities and business needs on their side. This can include the commission to a franchise sales rep, marketing about their opportunities, and keeping a support team and back office running. Technically and legally, the franchise fee is also a key waypoint for the franchise contract. The regulations around franchising set out by the Federal Trade Commission (FTC) declare that for the contract to satisfy the conditions of being a “franchise” the franchisor must require a franchise fee greater than $500 in the first six months.

How Are Franchise Fees Decided?

The franchise fee varies between different industries and depends on who the franchisor is. This does not always mean that a lower price is better, as some franchise fees will include an exclusivity clause, which means that another of the same franchise can’t open up within a certain distance of your operation.

Franchise fees can range from $5,000 to $100,000 but usually fall within the $20,000 to $50,000 bracket. As mentioned above, the fee is made up of the costs of running the franchise system, but it also represents the returns to the franchisor for running a good system. Like any business, if there is high demand for people to become franchisees, they can charge more.

Most franchisors adopt a ‘set fee’ policy, meaning there won’t be much room for negotiation, but this also means that you know you are getting the same deal as every other franchisee. The Federal Trade Commission is very strict on the obligation of the franchisor to disclose everything that the franchisee must pay in the Franchise Disclosure Document so that they can weigh up their options properly and make a clear decision.

What Ongoing Fees Need to Be Paid?

The franchise fee and other upfront fees, such as territory fees or training costs, are only the initial fees that make up a franchise contract. There will also be ongoing fees that the franchisee pays at certain intervals (quarterly or yearly etc.). These will naturally include the ongoing inventory that you receive from the franchise suppliers, which are necessary to provide products and services to customers.

However, there are also other ongoing fees which include:

–          Royalty Payments: These are generally yearly fees which are like an ongoing rental price to the franchisor for access to their suppliers, brand name, logo, etc. The fee can either be a set fee or one that’s based on a percentage of revenue or profits. The franchisor may also make it a scaling fee, so you pay a lower percentage the more you make (though that will still be a higher royalty payment overall). Royalty fees average around 6% of revenue a year, with different calculations for profit-based and set fees.

–          Marketing Fees: One of the major advantages of being part of a franchise system is that you’re also part of a collective pool of marketing resources. This means that you will reap the rewards of national advertising campaigns or endorsements from major sports stars, which local-only competitors won’t be able to match. The contribution of each franchise to this pool is usually around 1% to 2% of revenue.

Renewal Fee: Laid out in your franchise contract will be the length of time the contract is for and the terms of renewal. This will most likely include a previously agreed renewal fee which is like the initial franchise fee but to sign the contract again.

Financing and Discounts for Franchise Fees

The initial franchise fee and other upfront payments can amount to quite a significant lump sum that you need to come up with to start out. Understandably that means that a lot of prospective franchise owners will need to look around for financing deals, while franchise fee discounts can also play a big role in decision-making.

For financing, there are dedicated small business teams at local bank branches, while there are also institutions that specialize in franchise loans. Other organizations, such as the Small Business Administration, provide specialized small business loans at good rates for those who qualify.

In terms of discounts, it can be useful to look out for new franchisors, where getting in at ground level might mean they are charging lower franchise fees, though you will be sacrificing the security of a more established system. Additionally, many franchisors offer veteran discounts, which can make it easier to make up that initial franchise fee.

Conclusion

A franchise fee can be seen as an ‘entrance fee’ into a theme park or sports ground, it will get you inside and cover the basics, but it won’t cover everything. The fee is basically the payment to the franchisor for the use of their business system, branding, and all the previous marketing and goodwill they have built up over the years before. In exchange, the franchisee also gets the support, training, and honed business operation of the franchisor, as well as the use of their name.

If you’re interested in becoming a franchise owner, the best thing to do is talk to potential franchisors that you’re interested in to find out what exactly the upfront and ongoing fees will be. At Screenmobile, we believe complete transparency is the best way to form a strong relationship between all parties, so we’re happy to provide all details on what costs you’re likely to be facing, including the franchise fee. To find out more about the potential investment, you can read about it here or get in touch with our team.