What are the Key Fees you should understand when you research your Franchising Plan?

By Paul Giggi

If you have decided to research a plan to operate a franchise then you should begin your due diligence in the brand, its costs and the development process.  With regards to costs, one of the important areas you need to fully understand is the fees you should be prepared to fund and what exactly they represent as part of the support of your franchised business.

These Key Items you will be funding are:

Franchise Fee

This is the fee you pay to the Franchisor to become an active Franchisee in their system. Typically, it is a flat fee that you would pay at the time you sign the Franchise Agreement. In some cases, the Franchisor will ask for a part of this fund at the time you sign up and then defer the remainder on a payment schedule or a lump sum payment at some time down the path to your opening your location(s).  There are a number of iterations of the payment plans and you should ask what they might be when you are doing your brand research. This is not a reoccurring payment and can be viewed as your membership fee. In addition, many brands will have discounts for different organizations, such as military veterans, so be sure to inquire about this possibility.


This is the percentage you will pay on a regular basis which constitutes the fund that is your payment for the items I listed in my previous blog.  These Franchisor deliverables noted include brand awareness as well as all of the support systems that you will rely on as you manage your business.  This fee is calculated as a percentage of your sales and typically you pay this amount on a monthly basis. Usually, this percentage is not negotiable so be sure you understand what support you will receive from the Franchisor for the amount you will be paying.  Consider this as a set cost category in your Profit and Loss Statements each month.

Marketing Fund

This fund is based on a percentage of your sales as with your royalty amount.  This is a fund that is used by the Franchisor to create marketing collateral that support the marketing programs they have and will develop for the brand.  The items that are normally supported by this program are print material (i.e. direct mailers, signs, etc.…), creative design, media support, specific local marketing materials and marketing department administration costs.

In some cases, the Marketing fund is broken into National and then Local Co-op programs. The National Program will fund Marketing programs that are rolled out across the entire concept and support the brand’s total system.  These programs are normally Franchisor mandated programs that are implemented via large reach media such as television. Local co-ops are where franchisee funds go into a collected pool of dollars in a specific market area that is owned by a group of specific franchisees.  In this case, the franchisees of the Co-op decide what to spend this fund upon and are assisted in this endeavor by the Franchisor.  These funds are normally spent on marketing programs that impact the area in which the Co-op operates and are not planned to reach beyond the franchisee groups area of development.  These programs are typically approved by the Franchisor, who in turn assists in the specific program’s development and the associated collateral through their Marketing team and partners.

As with the royalty fee, this fund’s percentage is not normally negotiable so again be sure you understand what support you will receive from the Franchisor and consider this as a set cost category in your Profit and Loss Statements.

Buying a Restaurant

Typically, restaurants will be listed for three (or more) times their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or, in the simplest of terms, their ‘cash throw-off’. Be sure that the seller has kept good books, preferably with a CPA. Ask for a recent Profit and Loss (P&L) statement. 

For a Restaurant that does $2M in sales; ‘all in’ rent should be between 7% to 10% of gross sales. COGS should be around 30%, EBITDA should be between 15% to 20%. 

Of course there are other factors to consider: Business debt, personnel and training, brand image and awareness, location, rental rates, equipment condition, Franchisor and/or Landlord qualification, COGS (Cost of Goods sold), inventory value, comparables in the market, and others.

Be sure to have a contractor do a thorough inspection of the premises and report any issues in writing. Have a food service company come out to and take an equipment inventory and condition assessment. You can sometimes get this service gratis if you are willing to consider purchasing any necessary replacements from the vendor (at a competitive price of course). Sit down with your bank, CPA, attorney, and business broker to review all aspects of the business deal including the lease (pay close attention to the assignment clause and any hidden approvals or fees associated with transferring ownership).