"What is the Franchise Fee?" This is perhaps one of the most common questions asked by a potential franchise buyer. And while this is certainly one of the considerations when researching a franchise system, it's definitely not the most important figure to look at. Why is this?
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.
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.
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.