So, just what exactly is a Franchise fee? How about Royalty fees? What does a franchisee get by paying a franchise fee or royalty fees? For those who are investigating a potential investment into a franchise system, these are important questions.
Think of a franchise fee as the right to use a brand that has been built up over the years, and has many tried and true systems behind it that are designed to help a new franchisee succeed in running their business. Most new businesses go through a period of trial and error when building a following. This period uses lots of working capital and time. When buying a franchise you are avoiding many years of this learning curve. Many times the Franchise Fee may seem expensive, but in the long run it may actually be a bargain for the time and money it will save you!
Royalty fees are those payments a franchisee might send each month in order to continue receiving the benefits of belonging to the franchise system.
For example, these fees not only pay for the rights to use the logos and trademarks of the franchisor's system, but also access to services that are designed to help a franchisee develop their location (demographic information, architectural assistance, site visits, fixtures, signs, and sources for equipment). Franchisees also may receive training, access to software to help run their business, access to advertising outlets (social media, publications, etc.) and access to the franchisor's marketing and graphic design department (which can help deliver customer flyers, ads, artwork and more). The royalty also gets you the keys to contacting other business owners who are trying to do the same things that you are trying to do - which can save you time and effort. For example: What is working, what isn't, how can we take something and make it better? New ideas are sometimes being tried throughout the system, and you'll have access to the success and failure rate of those new ideas.
A good franchisor will also use these fees to grow the system through research and development (in order to stay competitive), monthly meetings, and the continued development of training and operational resources. Software programs, management and cost saving systems are additional areas where the fees are used.
It's also important to remember that every franchise system is a little different. Depending on the industry, the types of services a franchisor may provide could vary. Also, size could play a factor. For example, while a smaller franchise system may not be able to offer some of the services much larger franchisors can offer - a smaller system can provide a level of personal service that the bigger systems can't.
However, if you really want to understand what you're receiving from the franchisor, be sure to read your franchise agreement. This will detail exactly what the franchisor will provide for you. And if there's something the franchisor said they would do, but it isn't a part of the franchise agreement, you may want to discuss it with them. Also be sure to refer to the Item 11, a document that outlines services the franchisor provides.
In the end, a franchise fee could be looked at as a kind of investment into the future success of a new business. By having access to years of knowledge and experience, a franchisee may take comfort in the knowledge that they won't be wasting time and money or processes that just don't work. And even more importantly, they'll have a friend in the business who is there to help them succeed!
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