If you’re planning to open a business, you understand that there are costs involved. One major difference between launching a new, independent business and buying a franchise is the inclusion of franchise fees. On paper, franchises may seem more expensive than independent businesses because of these fees. However, it’s important to understand what franchise fees are, why they exist and what benefits franchisees get with them.
Why franchise fees exist
Almost every franchise system will charge franchise fees when an owner opens a new franchise location. Franchise fees are payments a franchisee makes to a franchisor to use the brand’s name, logo, products and other elements of the business identity. Essentially, the franchise fee is the cost to license the business.
In most franchise systems, there will be an up-front franchise fee associated with the initial investment in the business. Some franchises also charge franchise fees on an ongoing basis.
The exact cost of franchise fees will depend on the franchise system you’re entering. Some franchisors may offer limited-time discounts on franchise fees, or they might reduce the fee if you commit to multiple units. Many brands offer discounts on franchise fees to veterans/service members. No matter what, these fees will be detailed in the Franchise Disclosure Document and franchise agreement each party signs during the franchise purchasing process.
Some prospective franchisees question the need for franchise fees—especially since they still have to pay for all the other startup costs for their business. But it’s important to realize that the franchise fee is in investment in all the work you did not have to do.
As the franchisee, you benefit from the time, energy and cost savings associated with opening an established business. Rather than build your business from the ground up—with no name recognition, established systems or proven product line—you’re buying all that up front. This can save you a tremendous amount of time and effort and help you achieve profitability much faster. The assets you get access to by joining a franchise system are extremely valuable, which is why the franchisor charges the franchise fee.
Ongoing franchise fees
The franchise fee is an established element of any franchise system’s costs. However, there are other, ongoing fees franchisees must know about, too. These may be called “franchise fees” casually, but they are separate from the initial franchise fee and serve different purposed. Franchisors will include estimates of these fees in the Item 7 of the Franchise Disclosure Document (FDD).
For example, the franchisor may also charge a monthly or annual royalty fee. This is typically a percentage of your business’s revenue or gross sales. Royalty fees help pay for the ongoing support you receive from the franchisor, like training and product development.
Many franchise systems also charge a marketing and advertising fee. This may be a flat fee or a percentage of your revenue, charged at regular intervals. These fees support the franchisor’s overarching marketing strategy, which builds awareness for the brand and your business.
Plan for franchise fees in your funding strategy
Franchise fees must be incorporated into any entrepreneur’s budget as they prepare to open a business. Fortunately, franchisors make it easy to plan a startup budget. Most franchises will provide a cost estimation with items broken down, including franchise fees, equipment costs, real estate and more. This gives you a good idea of how much you’ll need to plan for in your startup funding strategy.
When you receive the Franchise Disclosure Document from the franchisee representative, pay close attention to the initial investment numbers. This will help you create a benchmark for funding. You’ll also need to be on the lookout for any ongoing fees associated with the franchise, like a monthly royalty payment. These numbers will be instrumental in building your business’s operating budget for the years ahead.
At Tenet Financial Group, we help prospective franchisees get the money they need to launch and operate their franchise businesses. Contact us to explore our funding products and find the right one for your funding strategy.