Everything You Need to Know About Franchise Fees

Are you looking to expand your business but lack the capital to do so? Is the demand for your business overwhelming your ability to supply it to everyone? Are you worried your competitors will grow their business before you can?

It may be time to investigate the idea of franchising your company. Bring an influx of new capital to your company with franchise fees. Grow your business without you having to oversee each location personally.

If you’ve decided to explore franchisor income and the franchise agreement, then keep reading to learn more. This guide will walk you through how to manage franchise fees and start growing your business today!



What Is a Business Franchise?

Franchising is one of the fastest ways to grow your company. You sell the rights to someone to use your branding, trademarks, and practices as the franchise owner, or franchisor.

The franchisee invests capital, the franchise fee, to purchase the rights from you. Plus, they often continue to pay royalties throughout the life of their franchise agreement. In return, they can take advantage of the customer loyalty and market share you have built.

In addition, they are the ones who scout for the location and sign a lease agreement. They hire and train the team members for their location. You are able to expand your company without having to manage each individual location, saving you time and money.

What Are Franchise Fees?

First, you need to establish your franchise fees. This is the amount someone pays you to become a franchisee. Usually, you will have an initial one-time buy-in fee, plus ongoing royalties and marketing fees that are paid annually.

Franchise Fees 

The initial franchise fee gives the purchaser the right to open a new branch of your company. It covers the use of the business name, logo, marketing materials, and website. It also gives them access to product development, equipment, and training.

Franchise fees generally range from $20,000 to $50,000 for a license. If someone wants a master franchise to open multiple franchises in a large geographical area, those would start at $100,000 and go up from there.

As the franchisor, you need to determine how much are franchise fees for your company going to cost. Consider a few different elements, such as how much it will cost you to provide the marketing and training support.

How much competition is out there? What is the franchisee’s potential profitability? 

Royalties

A royalty is an on-going fee a franchisee pays for your support. They are often paid monthly and are a percentage of their revenue. Royalties are usually between 4% and 12%, depending on the industry.

Some industries will charge a flat fee, but this can be a burden to the franchisee. Using a percentage structure allows for the natural ebb and flow of business performance from year to year or even season to season. Although it is inconsistent from month to month, it helps ensure franchisees have the profitability to pay it consistently and not fall behind on their payments.

To establish the royalty amount, consider how much support you want to offer and how much you need to make to cover reinvesting in the business. It’s a balance between you and the franchisee to make sure you are covering your costs and giving them the support they expect for that amount.

Marketing Fees

Promotional campaigns should be managed at the company level, not the franchise level. You will want to manage your company’s advertising to keep your marketing message consistent and on-brand.

Charging a marketing fee allows the franchises to share the costs of the campaigns. They get the advantage of brand awareness and coverage. You have the advantage of getting some of the campaign costs covered and input about what’s working at the local level.

Marketing fees are usually calculated as a monthly percentage and often lower than royalties. A typical marketing fee is between 2% and 4% of monthly revenue.

Renewal and Exit Fees

Finally, there are also fees when the franchisee reaches the end of their agreement. They may decide to renew their contract and continue with the business. Or they may decide to end the contract or sell their franchises to another franchisee.

The fee to renew a contract compensates for continued support and resources. Alternatively, the exit fees cover managing any handover process or loss of revenue caused by closing down a location. Include these fees in the franchise agreement so everyone is aware of the costs from the beginning of the partnership.

Other Costs to Your Franchisee

There are other costs involved in setting up and running a franchise. Although these fees don’t go directly to you, the franchisor. However, it’s good practice to make sure your franchisees know what they are so they can be successful in starting and managing their franchise.

These initial fees could include lease and refurbishing a location, purchasing equipment, or hiring and training staff. Any local or state registration fees and licenses need to be properly arranged and paid. They also need to purchase the proper liability insurance and worker’s compensation insurance.

Grow Your Business With Franchising

Understanding what to include in your franchise fees is an essential first step to franchising your company.

You have to balance attracting the right investor to your project who will help you expand your business by covering the costs for the support and training you will provide to them. The right fees allow you to make a healthy profit and continue attracting franchisees to grow your business. 

Contact us to learn more about franchising your company and see if it’s the right opportunity for you!