Know The Franchise Ownership Costs Before You Leap From initial investments to royalty fees to legal costs, take stock of these numbers before it's too late.
By Clarissa Buch Zilberman Edited by Jessica Thomas
Key Takeaways
- Before diving into a franchise, it's crucial to understand the initial franchise fee.
- Unlike the initial franchise fee, royalty fees are ongoing and usually a percentage of your gross sales.
- The FDD is a critical document that outlines all fees, costs, and obligations involved in purchasing and operating a franchise.
This story appears in the September 2024 issue of Start Up.
Once you've settled on the right franchise brand for you, it's time to run the numbers — from one-time costs to all the associated fees that come with buying and operating a franchise day-to-day.
There are many costs unique to franchising that every franchisee-to-be should be aware of. While these fees will be clearly outlined in the Franchise Disclosure Document (FDD) that you are required to review before buying the franchise, it's best to know what these terms mean right from the start.
Franchise fees
One of the biggest perks of franchising is buying into the company's preexisting model, business method, and support systems — not to mention the right to use its trademark. To do that, you must pay what's called a franchise fee. These fees differ from franchise to franchise, but they are typically a one-time payment.
What exactly are you paying for? The franchisor is responsible for developing and maintaining its business model, training you, and providing you with a support system. This fee helps the franchisor recoup some of those costs.
Royalty fees
Royalty fees are ongoing payments — often weekly, monthly, or quarterly — to the franchisor. Typically, they're a percentage of your gross sales. Royalty fees enable the franchisor to continue to support your business through an ever-evolving roster of training, marketing, and product development services.
Because royalty fees are calculated differently by every franchise, it's important to understand what you'll be responsible for and what you'll receive in return. For instance, royalty fees can be a regularly paid flat rate for the life of your franchise, or they can be tiered, meaning your payment percentage decreases as your sales increase.
Training and support fees
Some franchisors charge these fees in addition to the initial franchise fee and ongoing royalty fees — for both the training needed before your business opens as well as continuous training, education, and support as your business evolves. If your franchisor does not charge these fees separately, then they're most likely included in one of the two aforementioned fees.
Advertising fees
Franchisors need capital to operate their national commercial, social media, billboard, and even paper-mail ad campaigns. Similar to royalty fees, advertising fees are usually a percentage of your gross sales, paid regularly to the franchisor to contribute to its overall advertising fund.
Advertising fees contribute to building brand recognition and attracting new customers to the entire franchise system. As a franchisee, you should understand what type of campaigns you can expect to see as a result of your payments — and know that these advertisements are for the brand as a whole, not individual locations.
Equipment, inventory, and technology fees
Depending on the industry and franchise, you might need to purchase specific technology, equipment, or inventory from the franchisor or their approved suppliers. This can include everything from point-of-sale systems to uniforms to food products. It's difficult to estimate how much these costs will be and how frequently you will need to pay them, because they vary depending on the industry and the franchisor's requirements — so be sure to ask about them.
Legal fees
Finally, you'll need to hire an attorney to review the franchise agreement and advise you on any potential legal issues or concerns that you might be responsible for as time goes on. This can be a significant expense, depending on how complex the franchise agreement is and what the lawyer's rate is, but working with an experienced franchise attorney can help you navigate the franchise agreement and protect your interests as you begin your journey.
Related: Which Franchise is Right For You? Follow These Steps
