As a new franchisor, what franchise fees can you expect to collect?
Franchising and business law attorneys get this question all the time — aspiring franchisors want to know about their potential profits. However, since every franchise system is different, no easy, one-size-fits-all answer exists.
That said, we can give you an overview of the types of fees most franchisees pay.
Initial Franchise Fees
New franchisees must make an up-front, one-time payment to join a franchise system.
The amount is determined by the franchisor, so it can vary from company to company. In most cases, initial franchise fees are fairly large, ranging from several thousand up to several hundred thousand dollars. Well-known businesses generally come in on the higher end of the scale.
The initial fee is usually due when the franchise agreement is signed. Often, a franchisor requires at least a portion to be paid in cash, then allows the franchisee to finance the remainder over time, with interest.
Continuing Royalty Fees
Franchisees also make ongoing royalty payments to their franchisor. On a periodic basis — typically weekly, monthly or quarterly — these franchise fees must be paid in order to remain in business.
Royalty fees are most commonly calculated as a fixed percentage of gross sales. But a franchisor can also consider variations on the fee structure. For some franchise systems, using a variable, decreasing or increasing percentage of sales may make sense. A franchisor can also decide to charge a fixed royalty fee or to base continuing fees on cumulative average sales.
Advertising and Marketing Fees
Franchisees are also expected to make regular contributions toward the common advertising and marketing fund. Usually, payments are scheduled at the same frequency as the royalty fees. The franchisor uses this money to create materials that promote business for the entire franchise system.
Technically speaking, these contributions aren’t actually franchise fees. But as ongoing payments made to a franchisor, they can be considered a form of revenue.
One-Time Franchise Fees
Every franchisor needs to consider the continuing services they provide to franchisees. While some training and franchisor support is covered by the initial franchise fee, certain services can be provided on an a la carte basis.
Continuing education, additional field or management support and other extra services can often be treated as one-time user fees for franchisees. When a franchisor can calculate the cost of a specific transaction, event or service, the franchise fee can be charged separately.
Establishing fair fees in franchising can be a challenge. Consulting with an experienced attorney is the best course of action for future franchisor success. The professional team at the Franchise & Business Law Group in Salt Lake City, Utah, can help. For personalized, expert answers to all of your franchisor questions, contact us today.