This lesson is part of our free Franchise 101 course.
When you’re balancing the benefits of entering a franchise, one of the most important costs is the franchise fees. These are payments that you will have to make to the franchisor, some of them on an ongoing basis, others in specific circumstances.
The fees for some franchises may be obvious, while others are obscured by subclauses and conditions. Here are the main types of fees you can expect:
Initial Franchise Fee
This is the one-time fee you pay to the franchisor to join. It gives you access to the company’s proprietary business systems and the license to own and operate your location. It’s your buy-in to the brand and will be one of the big costs for starting up.
Initial franchise fees can be intimidating, but they have the advantage of being a one-off. They raise the bar for entry, but once you’re in, you won’t have to think about them again.
These are the big ongoing costs and the ones that will affect your profit margins. Franchises have a variety of ongoing fees that they collect monthly from franchisees. These cover services like marketing, technology, and the privilege of using the franchise’s name and systems.
In some cases, these fees are calculated as a percentage of your location’s total revenue; in other cases, they’re a fixed monthly fee. Consider which you’re comfortable with and how these costs compare with the earnings you expect from a franchise in your specific location.
One of the things that’s most easily overlooked is that it doesn’t just cost to enter a franchise, it costs you to get out as well. When you leave a company’s franchise system, they’ll probably charge you a number of fees, such as transfer fees or liquidated damages, if applicable.
If you’re planning to work with a franchise for a limited amount of time, then you obviously need to factor these into your calculations, but they’re also worth considering if you’re in it for the long haul. If life suddenly changes and you want out, how much will you have to pay, and how will you do it?
There may well be other fees that apply in specific circumstances, such as an audit, optional training, or interest on other fees. Find out how likely these are to come up, how often, and how much control you have over them. You don’t want to get caught out by any nasty surprises, especially ones that will interrupt your cash flow.
Compare for Context
Once you’ve found the fees for a franchise, compare them to other franchises in that industry, including ones you’re not interested in. This should give you an idea of how reasonable the fees are.
Whether you’re willing to pay those fees will depend on that question of reasonableness but also on your own circumstances. Maybe you’ll discover that a franchise you liked is unnecessarily expensive and go for something else in the sector. Maybe you’ll realize that the whole sector is too pricey for you. Maybe you’ll find out that you can afford your franchise sooner than expected.
Whatever you discover about fees, the important thing is to go in with your eyes open.