Are you ready to take the leap into the world of franchising? Once you’ve narrowed down your options and settled on a brand, it’s time to run all the numbers – from one-time costs to all the associated fees that come with buying and operating a franchise both day-to-day and long-term . run.
While a brick-and-mortar business might require you to secure a storefront and staff, and an e-commerce business might include software and inventory expenses, there are other unique franchise costs that you should be aware of. From initial investments to royalty fees to legal costs, take stock of these numbers before it’s too late.
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Franchise fees and initial investment
One of the biggest advantages of franchising is the acquisition of the pre-existing company model and business method. To do this, you make an initial investment called a franchise fee.
The franchise fee is the initial payment you make to the franchisor for the right to use the franchisor’s brand, business model and support systems. Franchise fees differ from franchise to franchise, but are usually a one-time payment.
Remember: the franchisor is responsible for developing and maintaining its business model, training you and providing a support system – and the franchise fee helps the franchisor recoup some of these costs.
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Unlike franchise fees, which are usually a one-time payment, royalty fees are ongoing payments that the franchisee makes to the franchisor. These fees are usually a percentage of your gross sales. How often you pay these fees varies, but generally you can expect to make a monthly or quarterly payment.
When you buy a franchise, you’re not just paying for a static business model. In return, royalty fees allow the franchisor to continue to support your business through an ever-evolving list of training, marketing and product development services.
Because royalty fees are calculated differently by each franchise, it’s important to understand what you’ll be responsible for and what you’ll get in return. For example, royalty fees can be a fixed rate paid regularly throughout the life of your franchise, or they can be equivalent, where the percentage payment decreases as your sales increase.
You’ve probably seen your franchisor’s national advertisements, Internet and social media campaigns, billboards, and even paper mail campaigns. This requires capital, so many franchisors require their franchisees to contribute to their advertising fund. Similar to royalty fees, advertising fees are usually a percentage of your gross sales, paid on a regular basis. With these fees, franchisors create and run advertising campaigns to promote the entire brand, not individual franchise locations.
Advertising fees are integral because they help build brand recognition and attract new customers to the entire franchise system. As a franchisee, you should understand how advertising fees are used and what type of campaigns you can expect to see as a result.
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Training and support fees
To provide ongoing training and support to franchisees, some franchisors charge training and support fees in addition to the initial investment and ongoing royalty fees.
Training and support fees are usually for training required before opening your business, as well as ongoing training, education and support as your business evolves. If your franchisor does not include these fees, then they are most likely included in your initial franchise fee or royalties.
Before moving forward as a franchisee, you should understand what type of training and support is available within the franchise as a whole and how much it will cost.
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Equipment, inventory and technology fees
Depending on the industry and the franchise, you may need to purchase specific technology, equipment or inventory from the franchisor or their approved suppliers. This can include everything from point of sale systems to uniforms to food products. It is difficult to estimate how much these costs will be and how often you will have to pay them, as they vary by industry and franchisor requirements.
Be sure to ask the franchisor about equipment, technology, and inventory requirements before signing a franchise agreement.
Finally, you must consider the legal fees associated with purchasing a franchise as part of your initial investment. You will need to hire an attorney to review the franchise agreement and advise you of any legal issues or concerns you may be responsible for as time goes on. This can be a significant expense, depending on how complex the franchise agreement is and what your attorney’s rate is.
It might be expensive, but working with an experienced franchise attorney can help you navigate the franchise agreement and protect your interests.
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Running the numbers
Buying a franchise can be a great way to start a business, saving time in creating a brand and business model from scratch. But beyond hiring staff and finding a location, there are more upfront costs and ongoing fees to plan for. Note that all of these fees will be clearly outlined in the Franchise Disclosure Document (FDD) that you must sign prior to purchasing the franchise.
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