Ready to enter the world of franchising? Once you have narrow your options and settling on a brand, it's time to run all the numbers—from one-time costs to all the associated fees that come with buying and operating a franchise both day-to-day and long-term.
Although a brick and mortar business may require you to provide a storefront and staff, and an e-commerce company may include software and inventory expenses, there are other costs unique to franchising that you should be aware of. From initial investments to royalty fees to legal costs, estimate these numbers before it's too late.
Franchise fees and initial investment
One of the biggest benefits of franchising is buying into a pre-existing company model and business method. To do this, you make an initial investment called a franchise fee.
The franchise fee is the initial payment you make to the franchisor for the right to use its trademark, business model and support systems. Franchise fees vary from franchise to franchise, but they are usually a one-time payment.
You remember: franchisor is responsible for developing and maintaining its business model, training you and providing you with a support system — and the franchise fee helps the franchisor recoup some of these costs.
Copyright fees
Unlike franchise fees, which are usually a one-time payment, royalty rates are ongoing payments that the franchisee pays to the franchisor. These fees are usually a percentage of your gross sales. The frequency with which you pay these fees varies, but you can generally expect to make a payment on a monthly or quarterly basis.
When you buy a franchise, you're not just paying for a static business model. Instead, royalty fees enable the franchisor to continue to support your business through an ever-evolving list of training, marketing and product development services.
Because royalty rates are is calculated differently of any franchise, it is important to understand what you will be responsible for and what you will receive in return. For example, royalty fees can be a fixed rate paid regularly for the life of your franchise, or they can be tiered, where the percentage payment decreases as your sales increase.
Advertising fees
You've probably seen your franchisor's national ads and social media campaigns, billboards and even paper mail campaigns. This requires capital, so many franchisors require their franchisees to contribute to their advertising fund. Similar to royalty fees, advertising fees are usually a percentage of your gross sales, paid on a regular basis. With these fees, franchisors create and run advertising campaigns to promote the complete brand, not individual franchise locations.
Advertising fees are integral because they contribute to construction brand recognition and attracting new customers throughout the franchise system. As a franchisee, you need to understand how advertising fees are used and what kind of campaigns you can expect to see as a result.
Training and support fees
To ensure training and ongoing support for franchisees, some franchisors charge training and support fees in addition to the initial investment and ongoing royalty fees.
Training and support fees are usually for training needed before your business opens, as well as ongoing training, education and support as your business evolves. If your franchisor does not include these fees, then most likely they will be included in your initial franchise fee or royalty fees.
Before proceeding as a franchiseyou need to understand what kind of training and support is available within the franchise as a whole and how much it will cost.
Equipment, inventory and technology fees
Depends on the industry and exclusivityyou may need to purchase specific technology, equipment or inventory from or to the franchisor approved suppliers. This can include everything from point of sale systems to uniforms to food products. It is difficult to estimate how much these costs will be and how often you will have to pay them because they vary depending on the industry and the franchisor's requirements.
Be sure to ask the franchisor about their equipment, technology and inventory requirements before signing a franchise agreement.
Legal fees
Finally, you should consider the legal fees associated with purchasing a franchise as part of your initial investment. You will need it hire a lawyer to review the franchise agreement and advise you of any potential legal issues or concerns for which you may be liable over time. This can be a significant expense depending on the complexity of the franchise agreement and what your attorney's rate is.
It can be expensive, but working with an experience franchise attorney can help you navigate the franchise agreement and protect your interests.
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Direction of numbers
Buying a franchise can be a great way to start a business, saving you time building a brand and business model from the beginning. But beyond hiring staff and finding a location, there are some startup costs and ongoing fees to plan for. Keep in mind that all these fees will be clearly described in the Franchise Disclosure Document (FDD) that you are required to sign prior to purchasing the franchise.