Franchising can be a strategic and potentially lucrative business venture. It offers many benefits, such as a proven business model, brand recognition and ongoing support. But while it looks like a streamlined path to success, an investor must factor in all aspects before signing on the dotted line, like the franchise fees. There are three primary categories of fees to consider.
Franchise fees, your entry ticket
A franchisee often pays upfront to obtain the license to operate under the franchisor’s brand. The amount of the franchise fee you pay will depend on the brand’s recognition, industry and the level of support provided.
So, if you are planning to take on a multi-million-dollar enterprise, it is safe to assume that the franchise fee will reflect the business value. However, there are states that do not have a cap on franchise fees, so thorough due diligence is essential.
Startup costs to get your doors open
To get your business up and running, you will need startup costs. Big franchises often mean big capital needs for real estate lease or purchase, equipment, inventory, permits and initial marketing. The franchisor may offer guidance on site selection and build-out standards, but the franchisee will shoulder the cost. The size and location of your franchise again impacts the amount you will pay.
Ongoing fees to support franchise’s brand health
Beyond the initial investment, expect to pay a percentage of your gross sales to the franchisor. These are the royalty fees, an ongoing compensation for using their brand and intellectual property.
Moreover, franchisees may also pay marketing fees, a contribution to a national or regional marketing fund, and technology fees, for point-of-sale systems, inventory management, and communication.
Understanding the financial commitment
Some franchisors may have additional fees. So, carefully analyze and project your ongoing costs to make sure they align with your financial goals. If possible, involve an experienced attorney to help you deal with the intricacies of franchise agreements.