Fees When Setting Up the Franchise
The most frequent franchise charge is correctly called a “franchise fee.” Some franchisees call it an “initial fee” or something similar.
A franchise fee functions similarly to a cover charge for a franchise system. Consider it a price you pay the franchisor for completing the groundwork in creating the brand and preventing you from falling into many of the problems that come with starting a business from the ground up. The franchise fee is an integral part of the franchise model because it allows the franchisor to generate the necessary funds to guarantee that its system and procedures are followed consistently across all its units in diverse regions.
The franchise fee covers the first authorization to utilize the franchisor’s system, including trademarks and proprietary operating system. It usually includes services like training materials and assistance in choosing a site that the franchisor gives to its new franchisees.
The cost of training is also included in the cost of starting a franchise. While the franchise fee generally covers training materials, franchisees must frequently fund their attendance fees (travel and accommodation) for training.
The cost of grand opening promotion or marketing is another frequent first franchise charge. Be prepared to pay professional fees to those who will assist you with the complexities of beginning a business. Lawyers, accountants, and government agencies that deal with licenses and permissions are examples of these professionals. Before you can open, you’ll need to pay your first insurance and tax payments.
In the breakdown of franchise fees, rent or real estate costs are a particular situation. Although some franchisors will provide a range for the first three months of rent based on their experience, a franchisor will seldom provide an estimate for real estate and building development, if necessary, due to the high amount of unpredictability from location to location and case to case.
Other typical franchisee startup costs are comparable to those of a non-franchise firm. General office supplies and equipment, industry-specific equipment, signs and décor (if not a home-based franchise), and inventory are all included in these expenditures.
The breakdown of opening expenses is provided in detail in Items 5 and 7 of the Franchise Disclosure Document (FDD) for a single franchise.
Fees for Running and Maintaining the Franchise
There are many expenditures to effectively manage the franchise business and stay a part of the franchise system once it is up and running.
The continuing costs are included in Item 6 of the FDD under “Other Costs.” The royalty fee is the most frequent recurring cost in franchising, and it is charged primarily for the continued use of the franchisor’s trademarks and proprietary procedures. Royalty payments are generally collected weekly or monthly as a fixed charge or a percentage of sales or income.
Other frequent recurring franchise costs include advertising/marketing funds, technology expenses, insurance, and employees’ salaries.
There are various items for which costs are collected as needed and routinely continuing fees, such as audit fees, ongoing training, renewal fee, and indemnification.
The FDD for a franchise within that sector may also include industry-specific costs, such as hotel reservation fees for hotel franchises. Additionally, some continuing expenditures, like staff pay, may not be included in the FDD.
After all of this, you should consider that although these fees are typical, they may not apply to all franchisees. Please read the franchise disclosure document (FDD) for information on investment expenses, and don’t hesitate to ask the franchisor any questions you may have.