The initial franchise fee is a one-time fee that you pay when you first become a franchisee with a system. This fee usually ranges from $25,000 to $40,000 but it can be more or less depending on the system.
What you receive in exchange for the payment of this initial franchise fee is the right to join the franchise and assistance in getting your new franchise business up and running. Franchise companies will usually specify a number of support obligations they will perform with you. These may include things like initial training, site selection assistance, marketing assistance, sourcing the goods and supplies you'll need and the like. The goal is to provide you with everything you'll need to get started.
The ongoing franchise fee or royalty is usually expressed as either a percentage of the gross volume of the business or else as a fixed periodic payment amount. It's paid to the franchise company in exchange for the continuing right to use the trademarks and operating system of the franchise during the term of your license agreement. This term is usually 20 years and is spelled out in the franchise agreement.
Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.