What is a Franchise Fee?

When investing in a franchise a buyer will most likely pay a franchise fee there is a LOT more to franchise ownership than this fee.

Our franchise development director says that "What is the Franchise Fee?" is the most common question asked by a potential investor.  While this is one of the considerations it is definitely one of the least important items to look at.

The franchise fee is the initial fee charged by the franchisor to give a franchisee the rights to use the logo, systems, and start a business with those items.  But, what you get for that fee with each franchisor does differ.  Things to compare for that fee are:

• How much training is included with this fee?  Every system has different training, some may be at the franchisor's office, some may be online, and some may be at your place.  A detailed outline of the training you should receive is included in the Franchise Disclosure Document in Item 11. 

• What items are provided?  Do you get manuals?  Most often you should get a Pre-Opening Manual and then also an Operations Manual.  There may be other items that are neccesary to your business - which of those are provided and what must you pay for going forward?

• Access to other franchisees or management?

• What kind of ongoing support is offered with the system?

The Real Value in a Franchise Fee

While these are the items to check the value of the franchise fee probably the most important thing that you are paying for is the learning curve that the franchisor paid for with years of previous experience.  This is what you need to find out about.  There are franchised companies out there with huge differences in the amount of experience they have in operating the concept that you are buying.

There are actually companies out there seek out new businesses to franchise. These are usually companies that market franchises. They charge the franchisor the fees to do the legal and set up work to make them franchisable and then also charge them to do the marketing.  If the franchisor does not have many years of operating history they will still be learning as they are also franchising - this is can be a dangerous combination!

The learning curve is the MOST valuable asset that you aquire when investing in a small business franchise!  At Shear Madness Haircuts for Kids the operating history was 13 years before franchising.  Most successful "new" franchises have suprisingly long operating histories.  Five Guys Burgers and Fries seems newer, however they have been in business since 1986, and began franchising in 2001!  Starbucks began opening coffee shops in 1985, and Papa Murphy's Pizza opened in 1981 and started franchising in 1995!

As companies grow they have successes and failures this is normal.  When you invest in a franchise most of the franchise fee is for the avoidance of those failures!  Those failures may have cost the franchisore hundreds of thousands of dollars. This alone can make the franchise fee a real bargain!

Investing in a small business franchise system can be a great opportunity. If you would like to receive a FREE whitepaper designed to help when evaluating ANY franchise click on the link below.