Though all franchises have different start-up costs, we have identified below some of the typical types of fees that you would need pay to a franchisor to operate their franchise.
The franchise fee
Paying the upfront franchise fee grants you the right to use the franchisor’s systems, brand name and trademarks in a specific territory. It can also cover training, support, the operations manual, site selection assistance and analysis, recruitment of employees and franchisee launch.
The franchisee fees paid to the franchisor should go towards helping the franchisor to continuously develop the franchise system.
Make sure that you are aware of what you get for your money before you sign anything and weigh up if you are getting value for money or if the fee is steep in comparison to what you actually receive in return. Ask the franchisor to justify the fee for you.
Not all franchises are equal and so franchise fees will vary between systems. Look at your potential competitors and what their fees are. Do they offer more but have lower or the same fees? How well established are they compared to the franchise you are interested in?
More established franchisors with good brand awareness can ask for a higher franchise fee due to the instant brand recognition you will receive as one of their franchisees as well as the comprehensive support and training they will offer you.
New franchise systems will tend to have a lower franchise fee than some of their big name competitors as they are not able to offer the same brand recognition. They may still have excellent systems in place to help develop the franchise which would be accounted for in the franchise fee, but all in all, their franchise fee should be a less than their established competitors.
When doing your due diligence speak to franchisees in the network (the franchisor should give you a full list of these, not just one or two) and make sure that one of your questions is, “do you think you have got value for money” i.e. is the franchise fee too much, too little or just right.
Ongoing franchise fees
Each month you will be required to pay the franchisor an ongoing fee, also known as royalty fees. This is usually a percentage of gross revenue or sales after VAT; check with the franchisor what their ongoing fees are as they will vary from system to system.
The ongoing fee will cover the continuous support the franchisor provides; the more a franchisor does the bigger the fee will tend to be.
You need to fully understand why you are paying the fee and what you are getting in return. Retail franchises will tend to have higher ongoing fees than e.g. home-based franchises because of the level of support they provide e.g. computerised point of sale systems, monitoring systems etc. The ongoing fee can also cover marketing, product/service development, market research,
This is the fee that you need to be comfortable with paying each month before buying a franchise. From experience franchisees are usually more than happy paying the monthly fee initially as they see a direct benefit i.e. support they receive during the launch of the franchise and when they need help the most. As their business starts to do well, many start to resent having to pay the franchisor each month as they start to believe it is all down to their hard work alone.
If you are not comfortable with the idea of paying an ongoing fee each month then franchising is not for you.
The franchisor is allowed to increase this fee if they can justify a reason for doing so. They should however communicate with all franchisees if deciding to do this to make sure that they are happy with the increase before making it. There is usually a good reason for increasing fee and one that should directly benefit you or one that cannot be avoided e.g. inflation.
The franchisor should be making a small profit each month from the fee which is necessary for them to move the business forward. If they do not make any money then there is little incentive for them to stay in the business. If both parties, franchisor and franchisees, are seeing a return on their investment, then both will be happy.
You therefore need to ask the franchisor:
- What is the ongoing fee?
- Is it a percentage or a fixed amount? And if a percentage, what is it based on?
- How often do I need to pay it?
- Is it more or less than your competitors?
- And what do I get in return for the fee?
More and more franchises are now including a monthly advertising/marketing fee to allow them to market the business nationally; you will usually be expected to pay for any local marketing yourself.
This fee is usually based upon a percentage of gross sales or net sales, though could be a fixed amount. It typically is between 1% and 5% of gross sales.
The benefit of this group marketing is that collectively the franchisor can afford to under quality marketing campaigns, including TV advertising where appropriate; something you could probably not afford to do if you were an independent business.
You need to ask the franchisor:
- Do you have a marketing fee?
- How much is it?
- How often do I pay it?
- Do all franchisee in the network pay the same?
- How does it compare to competitors?
- What do I get for my money?
- Do the franchisees have any say in what it is used for?
- How will I benefit from paying the fee? And how does the network as a whole benefit?
Other ongoing franchise fees you may need to pay include:
- Training fees
- Consulting fees
- Site selection fees
- Leasing fees
- Blueprint and specification fees
- Grand opening fees
- Auditing fees
- Accounting fees
- On-site management fees
- Application fees
- Exclusive territory fees
- Renewal fees
- Transfer fees