Understanding Franchisor Fees
May 26, 2017 2:41 PM
There are amazing benefits when contemplating an investment of a franchise business, but those benefits do not come without their costs. From up-front initial fees to payments that are tied to specific timetables or events, most franchisors have several different fees that they request to support the resources used by the corporate company on behalf of the franchisee.
It’s paramount to remember that this is by no means an exhaustive list of any charges the franchisor may levy on the franchisee. Any franchise agreement must be stringently reviewed to highlight any fees that will be charged, as well as what the franchisee will receive in conformance with said fees.
Start-up franchise fee
Most people with a passing knowledge of the franchise model are aware of the start-up franchise fee. This payment is usually made by the franchisee to the franchisor once a finalized agreement is signed and the franchise license is granted. More often than not, this initial fee can be made in other forms such as a payment schedule. This payment is typically submitted as a one-time, lump-sum payment.
Generally, the start-up franchise fee is made to the franchisor in return for an agreement to supplying the goods, processes, and intangibles that the franchisee will need to get the business operational. This can include things such as:
- Branded materials
- Proprietary equipment
- Site identification expertise
- Recruiting tools
- Training manuals
Start-up franchise fees vary depending on the brand, and the amount is usually determined by the breadth of the capital commitment from the franchisor to the franchisee.
Brand license fees/royalties
Many, although not all franchisors, will also assess royalty fees to each of their various franchisees. These royalty fees are also known as brand license fees, and they are ongoing payments made by the franchisee on a pre-determined schedule, most likely quarterly or annually.
Royalty fees can take many different forms and be configured in multiple different ways, so it’s vital for any prospective franchisee to carefully examine the section of the agreement that outlines on-going payments and compare them with comparable franchises. They are often calculated as a percentage of gross revenue, but some companies choose to mandate an additional mark-up on each product sold that gets set aside for the franchisor. Additionally, they can be set at a fixed percentage, or the percentage may fluctuate to account for seasonal periods, market fluctuations, or other phenomena.
Franchisees benefit significantly from the regional, national, or even global advertising apparatus of the parent company, so it’s not a surprise that they’re asked to offset some of the associated costs. Advertising fees are most often assessed as a percentage of sales, similar to royalty payments, but they can also be charged as a specified amount. It’s important for franchisees to remember that for most companies these fees go directly to the national or regional advertising costs, and franchisees are expected to cover any local advertising needs on their own.
The fees listed so far are the most common charges a franchisee can expect to encounter, but they are not the only ones. If the franchise agreement is a contract set for a specific period of time, the franchisor may assess a renewal fee should the franchisee opt to continue. In the event that a franchisee wishes to sell their business to someone, the franchisor may choose to levy a transfer fee as a part of the agreement. Additionally, franchisors may have stipulations to assess additional fees for situations such as new technology implementation, or retraining initiatives.