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.

New Franchise Businesses pop up all the time. If you are thinking of investing in one - how can you determine the risk? Every Franchise has to begin somewhere and some of the new ones are great opportunities. But, how can you tell?

Doing your homework is paramount when checking out a small business franchise. It does not matter whether the franchise system is old or brand new there will be similarities, the only difference in the documents that you will receive is that the list of existing franchisees or those that have left the system will be much less!

There are however many things you can ask about that will give you some good information to help evaluate the new franchise business.

• How long has the franchised business been in existance. It may be that the business is very established yet has just begun franchising. Our flagship store opened in 1997, yet franchising just began in 2010.

• Is the original concept operator still involved in the business? There are concept hunters out there who take a business and franchise it, yet they are not the ones with the years of knowledge they are just companies who see an opportunity to make some money franchising yet don't have the experience with the system to give you the training that you really need.

• Has the original business been able to run more that one location?

• Has the original owner tried many different ways of doing the business so they can direct you in what has worked vs. what has not? Making mistakes is not a bad thing. It is better that the franchisor has made them in the past rather than you making them in the future!

• Is the original owner going to be involved in your training?

• Is the business something that you can see being in demand for years to come?

• Can this business be replaced by the internet or other means?

• As franchising is different from owning an individual business what systems and processes has the franchisor put into place to make this conversion?

• What does this business concept have that sets it apart from others out there that may be similar? Is it something easily duplicable? Is it something that will increase your bottom line?

• How passionate are the owners about the success of this business?

There are both advantages and disadvantages of being in the first few to start a new business franchise -

• As one of the first few you get much more individual treatment from the founders.

• Your sucess or failure is much more important to the franchosr than those later in the system.

• There are bumps in the road for any new venture, as the franchisor is also embarking on a new way of doing there business you may have to help smooth out a few of those, your input will shape the future for many to come!

Exploring a franchise can be one of the most rewarding things you can do to expand your business acumen.

There are many businesses out there that are franchises.  They come in all shapes and sizes!  Some are brick and mortar store fronts as in McDonalds, Muscle Max, and Shear Madness Haircuts for Kids.  Others can be consulting type operations that either have offices or are home bases businesses.  There are business coaching franchises, as well as child safety ones.  There are home construction, repair, and maintenance franchises as well.

Even though the types of franchises may be different what they all have in common is the Franchise Fee. 

When you decide that you want to open one a franchise business you pay the franchisor a franchise fee.  This fee gives you the rights to use the logos, systems, and name of the company as your own name.  It also entitles you to be trained in their way of doing things – the systems that will contribute to your success and shorten your learning curve!

In doing your research you will discover that this franchise fee should benefit you in many ways:

• The franchisor has spent years perfecting the systems of the business.  If you follow them you will save years of time and boatloads of money discovering these on your own.

• This fee gets you a built in partner as well as a business coach.  They have done everything you are doing before and can hold your hand as you walk through it.

• The business already has a big head start on being well known.  Your advertising dollars will go further and easier than having to build this name recognition on your own.  The more franchise and corporate units there are the better for everyone in the system.

• Having others doing the same thing that you are doing in different areas allows you to discuss new ideas and failures to aid in everyone’s business success.

• The concept, logos, artwork, and ongoing developments are done by the franchisor; you should be able to grow along with them without doing this work yourself.

What does the franchisor do with the franchise fee?  Many have the misconception that this fee is all gravy for the franchisor.  There are many expenses a franchisor has that a normal business owner does not have.  Some of these expenses are:

• Training Programs, operating and preopening manuals.

• Commissions paid on franchise fees collected – if you are using a broker to find a franchise the broker can receive from 30 up to 80% of the franchise fee as commission.

• Franchise portal and listing fees of hundreds to thousands per month.

• Legal expenses that occur every year to update the Franchise Disclosure Document, annual registration fees, etc.

• Accounting fees to have financial statements audited annually.

That fee goes quickly!  But in the end it benefits you the franchise buyer more that it benefits the franchisor.