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.
Ready to take the jump into the franchise world? After you've narrowed down your options and settled on a brand, it's time to run all the numbers — from one-time costs to all the associated fees that come with buying and operating a franchise both day-to-day and in the long run.
Although a brick-and-mortar business might require you to secure a storefront and staff and an ecommerce company might include software expenses and inventory, there are other costs unique to franchising that you should be aware of. From initial investments to royalty fees to legal costs, take stock of these numbers before it's too late.
Franchise fees and initial investments
One of the biggest perks of franchising is buying into the company's preexisting model and business method. To do that, you make an initial investment that's called a franchise fee.
The franchise fee is the initial payment you make to the franchisor for the right to use its trademark, business model and support systems. Franchise fees differ from franchise to franchise, but they are typically a one-time payment.
Remember: The franchisor is responsible for developing and maintaining its business model, training you and providing you with a support system — and the franchise fee helps the franchisor recoup some of those costs.
Royalty fees
Unlike franchise fees, which are usually a one-time payment, royalty fees are ongoing payments the franchisee pays to the franchisor. These fees are typically a percentage of your gross sales. The frequency with which you pay these fees varies, but generally you can expect to make a payment on a monthly or quarterly basis.
When you buy a franchise, you're not just paying for a static business model. Instead, 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, where your payment percentage decreases as your sales increase.
Advertising fees
You've probably seen your franchisor's national commercials and social media campaigns, billboards and even paper mail campaigns. This requires capital, so many franchisors require their franchisees to contribute to their advertising fund. Similar to royalty fees, advertising fees are usually a percentage of your gross sales, paid regularly. With these fees, franchisors create and run advertising campaigns to promote the complete brand, not the individual franchise locations.
Advertising fees are integral because they contribute to building brand recognition and attracting new customers to the entire franchise system. As a franchisee, you should understand how advertising fees are used and what type of campaigns you can expect to see as a result.
Training and support fees
In order to provide training and continuous support to franchisees, some franchisors charge training and support fees in addition to the initial investment and ongoing royalty fees.
Training and support fees are typically for the training needed before your business opens as well as continuous training, education and support as your business evolves. If your franchisor does not include these fees, then it's most likely included in your initial franchise fee or royalty fees.
Before moving forward as a franchisee, you should understand what type of training and support exists within the franchise as a whole, and how much it will cost.
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.
Be sure to ask the franchisor about their equipment, technology and inventory requirements before you sign a franchise agreement.
Legal fees
Finally, you must consider the legal fees associated with buying a franchise as part of your initial investment. 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 your attorney's rate is.
It might be expensive, but working with an experienced franchise attorney can help you navigate the franchise agreement and protect your interests.
Related: Which Franchise is Right For You? Follow These Steps
Running the numbers
Buying a franchise can be a great way to start a business, saving you time in creating a brand and business model from scratch. But beyond hiring staff and finding a location, there are several initial costs and ongoing fees you need to plan for. Keep in mind that all of these fees will be clearly outlined in the Franchise Disclosure Document (FDD) that you are required to sign before buying the franchise.
