The Scoop On The Franchise Fee

By Pamela Gold

Whether you're investigating your first franchise opportunity or you're a seasoned franchisee, you might wonder how franchisors figure out what to charge for a franchise fee, and what you will receive for that typically sizeable investment. Read on to learn more about the franchise fee, the initial investment you will make to join a franchise system.

The Franchise Fee

If you're just starting to learn about buying a franchise, you've probably noticed that most opportunities have a franchise fee. This fee is your initial investment into the company. It is basically the cost you will have to pay to join the system and does not typically entitle you to supplies, signage, or any other material goods that you might need to open the doors to your new business.

The franchise fee does grant you access to the non-material items that tend to make franchises invaluable to entrepreneurs. You will gain access to and membership in a company with an already established brand and system. When you get a copy of a company's UFOC (Uniform Franchise Offering Circular), you can look at Item 11 to see what the franchisor's obligations are to its franchisees. The UFOC breaks down the obligations into services the franchisor must provide before and after the franchise is opened. Most people think of the franchise fee as paying for the services the franchisor provides to franchisees before they open the doors to their franchise. Services offered vary from opportunity to opportunity but you can typically expect to find the following services in Item 11 of the UFOC:

• The right to use the system, including the trade name, service marks, operating system, signage, decor, and more.
• Help with location and development of your new franchise.
• An Operating Manual for the system.
• Initial training.
• And often times, much more.

These services differentiate a start-up business from a franchise and often help entrepreneurs to establish and build their business much more rapidly and at a more successful rate.

Other Fees

There are some other fees that most franchisors will ask their franchisees to pay. These fees keep the franchisee in the system, 'maintain membership' and allow them to continue to enjoy the benefits and services that the franchisor gives to its franchisees. These fees usually come in the form of royalty fees and advertising fees and, depending on the franchisor, are expected on a regular, weekly or monthly, basis. Often, the royalty and advertising fees are a percentage of the franchisee's sales. The advertising fee pays for a national advertising program which the franchisor will set-up, and the royalty fee pays for the continuing services the franchisee receives from the franchisor, including support and the continued use of the brand. Types of fees and their corresponding amounts depend on the franchisor and the services the franchisee will receive.

Research, Research

Fees vary from opportunity to opportunity and before you sign any contracts, you need to find out what fees you will have to pay before purchasing a franchise and throughout the life of the business. You should also find out what obligations the franchisor has to franchisees and make sure those obligations are all in writing before you sign an agreement. The bottom line is that fees associated with franchise systems are typically well thought-out and in return you will receive invaluable services, systems, and an established brand.