Be an Informed Investor

When you invest in a franchise, a key to success is understanding the fee structure and what franchise fees are payable. Just as you would want to understand the fees, charges, and commissions on any investment you make.

There is no such thing as average franchise fees

Forget what you may have heard about an average franchise fee. There really isn’t such a thing. The fees that you pay depend on many factors, all of which you should consider before buying a franchise. Each franchise is unique, and so will have a unique set of franchise fees and charges. These will be detailed in the Franchise Disclosure Document (FDD).

However, there are some common franchise fees that you should expect to pay whatever the franchise in which you are investing. These include the initial and ongoing fees or charges.

Fees you pay to the franchisor

There are two main fees that you will pay to the franchisor:

1. The initial franchise fees

This is the fee the franchisor charges you to open a business using the franchisor’s brand. It usually also covers the cost of training, help to find a suitable location, sometimes initial marketing, and so on. 

2. Royalties

As part of your franchise contract, you will also incur other costs (listed in Item 6 of the FDD). The most common of these is a royalty. This is usually paid as a percentage of your sales revenues, and is charged to cover the continuing use of trademarks, brand names, systems, further training requirements, marketing, and so on.

Other fees you incur when you invest in a franchise

When you start any business, there are a range of fees and charges that you should expect to pay. These might include:

• Build costs

When you have chosen a location and the franchisor has approved it, you will need to consider the costs for the buildout. These usually include:

• Furniture

• Fixtures and fittings

• Equipment

• Any remodeling/building work

• Architect’s fees

Some of these items may be included in the franchise fee.

• Professional fees

You will need to pay for professional services, such as legal and accounting fees. These types of fees will also be ongoing, to be paid as and when needed.

• Supplies

You can’t run a business without buying supplies. The franchisor can run through estimates of the initial inventory you will need and then explain costs of ongoing purchases. Most of the supplies you need must be purchased from the franchisor. You will therefore benefit from their ability to buy in bulk and any deals that they have struck with suppliers.

• Working capital

Most new businesses take a few months to a year to become profitable. Don’t expect this to be different simply because you are investing in a franchise. Therefore, you’ll need working capital to cover the first few months as your business becomes established. You’ll need to consider the cost of supplies, labor, fixed fees such as rent, insurances, and any other costs of being in business.

• Marketing

Unless stated in the FDD, you should expect to incur costs when advertising and marketing your business. You’ll get help with marketing from the franchisor, but you should consider it as an essential cost of developing, maintaining, and growing your business.

Plan for the worst, hope for the best

When it comes to considering the costs associated with investing in and running a franchise, I recommend that you plan for the worst and hope for the best. Never cut your estimate of costs to the bone to make the franchise opportunity fit your expectations of a franchisee salary.

By carrying out your due diligence, you’ll make a wise investment that has the potential for profits to make your costs and franchise fees look tiny in comparison – and that will make you a happy franchisee.

As I stated at the top of this article, there is no average franchise fees. You must assess each franchise opportunity on its unique merits, including assessing the fees, charges, and costs you need to finance to make financial sense for you – which is as unique an equation as the cost structure itself.

If you’re considering becoming a franchisee, your first step is to take the Franchise Aptitude Test, or, if you would prefer, book a free consultation with New Ground Consulting, during which we will help you begin your journey.

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