Franchise fees are typically paid for the use of the franchisor’s trademark, brand, and operating system. The initial franchise fee will vary, and depends on the amount of training and support that is provided to get the new franchised location up and running. Typically the more established and recognized the franchise’s brand is, the higher the initial fee. Here’s some of the fees you should know about.
Royalties are the franchisor’s portion or share of the revenues for allowing you to use their trademarks and proprietary system. Ongoing royalty fees will vary: It is common to find royalties between five and six per cent for retail franchises and eight to 10 per cent for service franchises, depending upon the level of ongoing support and services that are provided by the franchisors.
When no royalty is charged, the cost it is usually built into product sales or sale of services. Typically the more involved the franchisor is with ongoing business operations, the higher the fee. A royalty ensures that the franchisor has a vested interest in your success.
In most franchise systems the franchisee is required to contribute a certain amount of money for regional and/or national advertising. Advertising is expensive and when all the franchisees put their money together, they are able to execute advertising initiatives that may not have been affordable otherwise
Advertising fees are calculated on a percentage of a franchisee’s gross sales, usually ranging from one to four per cent, collected monthly. However, every franchise system works differently.
Here are a few questions to ask a franchisor for a better understanding of the national/regional advertising fund:
- What type of advertising has been done in the past?
- What advertising/marketing initiatives are planned for the near future?
- How is the money held?
- Is the fund segregated from the franchisor’s regular accounts?
- Will the franchisor provide accounting or financial statements, pertaining to the funds expenditures, to the franchisees?
- How much of the fund is used to pay administrative expenses?
- Is there an advisory council set up and how many franchisees sit on this advisory council?
Renewal Fees and Redesign Costs
When it comes time to renew your franchise agreement, there will typically be a renewal fee and redesign or remodeling costs. This may include changes to the branding elements, equipment and technology and/or remodeling the physical premises of your location.
Often franchisors will collect a deposit prior to entering into a full franchise agreement. Franchisors often deal with hundreds of enquiries every month and simply cannot begin to find locations or assist with bank financing for everyone, so a deposit helps franchisors differentiate the serious candidates from casual enquiries. Deposits are typically a percentage of the initial franchise fee or the full initial franchise fee amount.
Adapted from the May/June issue of FranchiseCanada. Check out the May/June 2016 issue of FranchiseCanada, on newsstands now, or you can order your subscription by calling 1-800-665-4232 ext. 224.