All franchise fees (one-time, initial, ongoing, periodic, etc.) are detailed in Item 7 of a franchisor’s Franchise Disclosure Document (FDD). This article will dive deeper into what franchise fess are and what they are for to help you develop a more comprehensive understanding of part of the financial side of franchise ownership.
What Are The Initial Franchise Fees?
The initial franchise fee is a sum paid by the franchisee to the franchisor at the time the franchise agreement is signed. The initial franchise fee can range based on the number of territories, locations, and size of the market a franchisee is offered and chooses to acquire. It’s worth noting that the initial franchise fee is usually separate from fees dedicated to training, startup, technology, marketing, and promotional needs.
The initial franchise fee is paid by the franchisee for joining the team and having access to the brand name, business processes, systems, marketing tools, and coaching. Territories are typically covered by the initial franchise fee, which is why the initial franchisee can vary. Territories are defined in clear, quantifiable terms such as the distance from a specific geographic location, number of households, population level, number of businesses, and demographic criteria associated with potential customers.
What Are Ongoing Franchise Fees?
On-going or recurring franchise fees are fees that franchisees will be charged periodically. For example, “royalty,” “brand marketing,” and “technology” fees are different categories of ongoing fees that may be charged or invoiced on a monthly basis. Often these fees are charged at a specific percentage of gross revenue, so the actual dollar amount varies based on the total revenue a franchisee generates.
The rationale for charging x% on total revenue ensures that franchisees are charged proportionately. A franchisee generating $1M in gross revenue will pay more in absolute dollars than a franchisee who generates $750k in gross revenue. However, sometimes ongoing fees are set as a flat dollar amount with no relation to gross revenue (e.g., the license fee for a certain number of workstations, laptops, and software).
Are There Any Other Fees I Should Be Aware Of?
Other franchise fees only come into play in specific instances, such as a “transfer fee” if majority ownership of the franchisee’s territory changes. This might occur when the business is sold, and the franchisee elects to bring a new partner aboard who becomes the majority owner. Another instance of a specific fee could be a “renewal fee,” whereby at the end of the term of the agreement (usually 10, 15, or 20 years in the future), the franchise owner is charged a fee to renew their franchise agreement. This might be at a discount to the then-current initial franchise fee.
Takeaway
All the different fees that we touched on above are spelled out clearly in the FDD and the Franchise Agreement; however, hopefully, now you have a better idea of what these fees entail and why they are charged.
If you are interested in learning more about franchise ownership and the potential of pursuing it yourself, I invite you to schedule a call with me. You can be assured that if owning a franchise isn’t something that I would recommend in your case, I will be upfront with this.
I look forward to meeting you and discussing your goals and ambitions!
