One of the many questions I am asked on a regular basis is what do I get for my franchise fee and all those royalties.
Paying the upfront franchise fee unlocks the door to the franchisors’ proprietary business systems and more. You get the complete setup. The franchise fee is literally a license to own and operate the franchise business.
The franchise fee, also commonly referred to as the initial fee, is part of your up-front, one-time payment to the franchise when you sign up to become a franchisee. The franchise fee is your ticket in the door — it’s what you’re paying the franchisor in return for the use of their brand, trademarks, products and business model. It also typically includes initial training costs and those associated with location development.
Franchise fees are around $50,000. They of course differ between franchise brands, and even more so between industries. Franchisors are required to disclose this fee in the Franchise Disclosure Document
Initial Training is part of the franchise fee
The initial training often includes a combination of coursework and on-the-job training. It can take days or weeks, depending on the depth of the training and the complexity of the business. This training will cover the operations of your franchise, from start to finish — it’s everything you need to know to run the business from day one. Remember, your franchisor wants you to succeed. Part of that is making sure you can hit the ground running when you open.
Many franchisors hold training at headquarters, and you’re typically responsible for the cost of travel and lodging. However, some brands also make use of at-home modules. Sometimes a franchisor will send an experienced member of their team to assist you the first few days of operating your location, to ensure everything goes as smoothly as possible.
The Royalty Fee
While the franchise fee is a one-time payment, royalty fees typically occur monthly and can be thought of as a membership fee that covers the ongoing support from your franchisor. The most common way royalty fees are assessed is as a percentage of gross sales and, on average, sits somewhere between 5 and 9 percent. Some brands set a minimum dollar amount, or a percentage that varies depending on levels of sales.
Royalty fees are a typical franchisor’s main source of income. The franchise fee covers the cost of your application, training, initial marketing and advertising, sales commission and general costs incurred by the franchisor’s corporate team in getting you all set up. The royalty fee is the ongoing revenue stream that keeps franchisors afloat, as well as covering the expenses of providing you with ongoing education and support.
What Do You Get for a Royalty Fee?
Royalty fees are the franchisor’s income. Since royalty fees are recurring, they serve as maintenance fees for the franchisor. What do they maintain? For starters, it pays the franchisor’s overhead, but the franchisor reinvests most of the funds to promote the organization. It could include expanded product and service lines that are negotiated on behalf of all franchisees and help you expand your business offerings.
Also, technology and point-of-sale processes are continually updated and require support from each franchise. In all cases, the royalty fees support the infrastructure needed to support a larger brand and reputation than your franchise (but that makes you look like a more reputable, bigger fish in the business world).
In some cases, royalty fees include marketing and advertising efforts. So, the franchisor will coordinate a promotion to introduce a new product, for example, but the benefits of increased sales go to you, the franchisee. To complete the cycle, a portion of those sales goes back to the franchisor each month as your royalty fee.
Is It Worth It?
Having that royalty feed skimmed from your hard earnings can be tough to accept as part of a franchise purchase. But choosing a franchise (and paying fees) has significant value for you as an entrepreneur:
- Fewer Mistakes. With a winning process already designed, you will make fewer mistakes than if you go it alone. The franchisor has already worked through most of the bugs that trip up independent business start-ups.
- Support Network. When you have a question, there are many people to assist. From corporate to other franchisees, you will have a network of knowledgeable, experienced people—all of whom want you to succeed.
- Purchasing Power. As part of a larger organization, many of your products and services will be less than they would be on your own. Those savings directly increase revenue.
- Exit Assistance. You aren’t starting a business to leave it, but long-term ⦁ planning is important, and you won’t run your business forever. As a franchisee, it will be easier to sell—partly because you own a known brand and partly because the franchisor will assist in the transition.
- Increased Value. Every franchisee’s success contributes to your own. As a brand increases in value, so does your piece of the pie. And with that comes greater success.
Royalty fees may feel like an extra burden for your new franchise business, but the franchisor’s support creates a mutually beneficial financial relationship. The collaborative goal of high profit and business comes through the royalty fees that support your franchise.