What Fees are Associated with a Franchise?

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By Paul Giggi

Continuation of our series: “Five Key Questions to ask a Franchisor”

Question #3

If you haven’t had a chance to see our video on this topic I would like to suggest you do so for our conversational piece on this important topic. For this blog, we will focus on Questions #3 of our Five Key Questions to ask a Franchisor during your initial interview regarding the concept of your interest.

During your introductory discussions with the Franchisor we have shared that there are many questions to consider asking in your discovery phase to help you to determine if a concept and Franchisor are the right ones for you to partner with in operating the business.

The 3rd of our Big 5 Questions to Ask:

What are the Associated Franchise Fees and What do they Represent?

The Key Fee Items 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 may be iterations of the payment plans and you should ask what they might be when you are doing your brand research.

·       Royalty Fee

This is the percentage you will pay on a regular basis which constitutes the fund that is your payment for the support items I listed in one of our previous blogs.  This includes brand awareness and all the support systems that you will rely on that are provided by the Franchisor.  This fee is calculated as a percentage of your sales and typically you pay this amount monthly. Normally, this is a percentage that is not negotiable so be sure you understand what support you will receive from the Franchisor for the amount you will be paying; be sure to consider this as a fixed cost in your Profit and Loss Statements each month.

·       Marketing Fund Fee

This fund is based upon a percentage of your sales as is your royalty amount.  This is a fund that is used by the Franchisor to create marketing collateral to support the marketing programs that have been developed by the franchisor for the brand.  The items that are normally funded 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 Fund Fee will fund national programs for the concept such as television commercials and other types of nationally played media. The Local Co-Op fees are where funds go into a pool in a specific market area; franchisees that are a part of that group or co-op  decide what type of marketing programs on which to spend this fund. Franchisees are normally assisted in this application by the franchisor.

·       Other Fees

When you are evaluating a Franchise be sure to ask what other fees may be tied to being a Franchisee. These fees are important for you to understand as they will become, in most cases, a part of your month-to-month P&L, and need to be figured into your proformas as you evaluate if a concept is right for you.

When you are evaluating your investment cost there are other fees to remember and discuss with the Franchisor to determine which may be covered in the range of investment they will share with you for your financing.  Not all fees are included in this estimate.  Some examples of these fees are:

o   Liquor license fees if applicable

o   Legal fees

o   Real estate fees or commissions

o   Financing application fees

o   Inventory costs

Look for our next blog, Questions #4… “Qualifying for a Franchise”