Fully understand both before you purchase a franchise.
As you are in the decision-making mode and considering opening a business, one of your options is a franchise. One of the first steps is to find the right franchise that matches your professional acumen and personality. Next is reviewing the franchise fees.
Franchise fees can range between $10,000 and $70,000 with fees at the higher end for nationally recognized brands. Some franchises can be much higher depending on a variety of factors.
The franchise fee is a one-time cost that you are charged at the beginning of the purchase process and is due at the time you sign the franchise agreement. There is no uniform formula for these fees. The person or company who owns the product, service, or system that you’re buying determines the price. So, the fee will depend on the particular franchise you’re looking to buy, and they can vary widely.
In some instances, the franchisor will require that you pay a portion of the fee in cash and allow you to finance the remainder with interest. Understand that this fee may not be refundable although some franchisors do have a grace period of 30-45 days to receive a refund.
What is your return for the fee payment?
You acquire the right to use the franchisor’s trade name, trademarks, and service marks, methods and support mechanisms. In some instances, you may receive any computer software or systems that are necessary to operate your franchise.
Included in the fee may be assistance with site selection, shop or building construction and layout, equipment selection, and finding business signs.
The franchisor may:
- Help you find a location within a specified geographic area of its choosing, that way you don’t compete with another franchisee
- Assist you in finding a brand of equipment and then help you find a supplier of that equipment, or it might give you a list of providers that you are required to use for any supplies
- Train you and your employees (including managers and supervisors) on how to use the franchisor’s system or product
- Keep you informed of any improvements or changes to the franchisor’s system or product that might happen after you’ve signed the agreement, and will provide continuing training for you and your employees if required by any change or improvement.
- Assist you with learning how to manage and operate the franchise successfully, such as advice on personnel placement, marketing, and pricing, as well as tips on holding a “grand opening” event.
Almost all franchises have an ongoing monthly or weekly franchise fee typically due for the month in question by the 10th or 15th of the following month. The ongoing weekly or monthly franchise fee is often called the royalty fee. This fee is typically a percentage of the gross sales. The franchise fee can also be a fixed amount that does not vary with volume. Some franchises do not require a royalty fee but do require the franchisee to buy products or services from a particular supplier with a markup. The markup allows the franchisor to generate income under the franchise agreement.
Royalties calculated as a percentage of sales may vary from 4%-6%, but some are as low as 1% or as high as 50%. This royalty allows the franchise company to cover the costs of ongoing services to support the franchisee.
Evaluate the royalty fee by determining the amount of profit after all the expenses including the royalty fees. Compare this average income to the initial investment and determine the expected rate of return. If the rate of return seems unreasonable, we suggest you step away. It is important to feel confident about the bottom line before you jump into a new business.
Starting a new business is an adventure but one requiring tenacity. If you do your due diligence and fully understand your franchise fee and royalty fee you will be able to make projections for the future. Fully understanding the legal and financial implications of purchasing and growing a franchise will help you achieve a better chance for success.