Ready to take the leap into the world of franchising? Once you’ve narrowed down your options and chosen a brand, it’s time to crunch the numbers—from one-time costs to all the fees that come with buying and running a franchise, each day to day and over the long run.
While a brick-and-mortar business may require the security of a storefront and staff, and an e-commerce business may include software and inventory expenses, there are other franchise-specific costs you should concentrate on. From upfront investment to licensing fees and legal costs, take stock of those numbers before it’s too late.
Franchise Fees and Initial Investment
One of the biggest benefits of franchising is that you buy into a company’s existing business model and method. To do this, you make an initial investment called a franchise fee.
A franchise fee is the initial payment you pay to a franchisor for the right to use its trademark, business model, and support systems. Franchise fees vary by franchise, but are often a one-time payment.
Remember: the franchisor is responsible for developing and maintaining its business model, training you, and providing you with a support system — and the franchise fee helps the franchisor recuperate some of those costs.
License fees
Unlike franchise fees, which are typically a lump sum payment, royalty fees are ongoing payments that a franchisee pays to the franchisor. These fees are typically a percentage of gross sales. The frequency with which you pay these fees varies, but you can generally expect to pay monthly or quarterly.
When you buy a franchise, you’re not only paying for a static business model. Instead, licensing fees allow the franchisor to proceed supporting what you are promoting with an ever-expanding list of coaching, marketing, and product development services.
Since royalties are calculated in a different way by each franchise, it is important to understand what you’ll be responsible for and what you’ll receive in return. For example, royalties could also be a regular flat rate paid over the lifetime of the franchise, or they might be graduated, with your payment percentage decreasing as sales increase.
Advertising fees
You’ve probably seen national ads and social media campaigns, billboards, and even unsolicited mail campaigns from your franchisor. This requires capital, so many franchisors require their franchisees to contribute to an promoting fund. Like licensing fees, promoting fees are typically a percentage of gross sales, paid on a recurring basis. With these fees, franchisors create and run promoting campaigns to promote their entire brand, not individual franchise locations.
Advertising fees are an integral a part of building brand recognition and attracting recent customers to the entire franchise system. As a franchisee, you should understand how promoting fees are used and what type of campaigns you can expect as a result.
Training and support fees
To provide franchisees with training and ongoing support, some franchisors charge fees for training and support in addition to the initial investment and ongoing licensing fees.
Training and support fees typically cover training needed before you open what you are promoting, in addition to ongoing training, education, and support as what you are promoting grows. If your franchisor doesn’t include these fees, they’re likely included in your initial franchise or licensing fees.
Before you resolve to turn into a franchisee, you should discover what training and support is available across the franchise, in addition to how much it can cost.
Equipment, supplies and technology fees
Depending on your industry and franchise, you may need to purchase specific technology, equipment, or supplies from the franchisor or its approved suppliers. This could include the whole lot from point-of-sale systems to uniforms and food products. It’s hard to estimate how much these costs will probably be or how often you’ll need to pay them, as they vary by industry and franchisor requirements.
Before signing a franchise agreement, ensure to ask the franchisor about its requirements for equipment, technology and inventory.
Legal fees
Finally, you need to factor in the legal fees associated with purchasing a franchise as a part of your initial investment. You will need to hire a lawyer to review your franchise agreement and advise you on any potential legal issues or concerns you could also be responsible for over time. This could be a significant expense depending on how complex your franchise agreement is and what your lawyer’s rates are.
It could be expensive, but working with an experienced franchise lawyer may also help you navigate your franchise agreement and protect your interests.
Converting numbers
Buying a franchise could be a wonderful means to get began, saving you time building your brand and business model from scratch. But beyond hiring employees and finding a location, there are a few upfront costs and ongoing fees you’ll need to plan for. Keep in mind that every one of those fees will probably be clearly outlined in the Franchise Disclosure Document (FDD) you’ll need to sign before you buy a franchise.