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Can you help me understand the difference between various franchise fees?

By Jeff Elgin

Opinions expressed by Entrepreneur contributors are their own.

A franchise I'm interested in mentions a fee of $20,000 and then lists capital requirements of up to $235,000. Can you clarify the difference between the two and explain the initial setup costs a franchisee is expected to pay?

Almost all franchises charge an initial franchise fee to get involved.  This fee helps the franchisor offset some or all of the costs of recruiting and training new franchisees. 


The other costs mentioned as part of "capital requirements" would typically include all of the other investments that need to be made in order to have the business up and operating.  This would include everything from soup to nuts that goes into a new unit, even including your initial marketing and cash reserves needed for the first few months of operation.  This figure is often referred to as the "total investment" number for the business.


Whether the costs are fees to the franchise company or are for other costs of building out your new business, you should find them completely broken out in the disclosure document the franchisor is required to give to you during your investigation.  Make sure you carefully review this information and ask questions until you're sure you know where all the money is going.


 


 

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.

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