If you’re contemplating buying a franchise, you likely have questions about the fees charged by the franchisor and what they cover. The amounts you pay to a franchise company can be broken down into two main categories — an initial franchise fee and various ongoing franchise fees. As a general guide, here’s a breakdown of what each category covers.
Initial Franchise Fee
This is the one-time, up-front fee you write a check for when you sign an agreement and join a franchise system. Signing an agreement and paying this fee allows you to use the franchisor’s business system and/or products. This can include the right use the company’s trade name, trademark, operating manuals, other proprietary materials and/or computer software.
Details about the fee are provided in Item 5 of a company’s franchise disclosure document (FDD).
Many factors are used to determine franchisee fees, including the uniqueness and complexity of the system, the profitability and expected ROI of the business and the company’s costs for development and acquisition and granting franchises. What’s covered by this fee can vary greatly among franchise companies, but our Signarama franchise fee covers many key items that help you get your business up and running, such as:
- Initial training
- Location selection and lease negotiation assistance
- Site build-out assistance
- Access to our suppliers
- Assistance with employee recruitment and training
- Help with the ramp-up and launch of your store
- Assistance from support staff for your grand opening
- Startup marketing kits
To determine if the amount of a franchise fee is justified, you should weigh it against the costs involved in starting a similar independent business, as well as the training you’d need to gain the necessary skills and various third-party services you’d utilize during the process.
Ongoing Franchise Fees
After you’ve paid the initial fee and your location is up and running, you can expect to pay various ongoing fees to the franchise company. Here, we’ll look at the two most common fees charged by franchisors — royalties and advertising — as well as some additional fees you may encounter.
- Royalties: These franchise fees are typically calculated as a percentage of the weekly or monthly gross sales, and they may be payable weekly, monthly or quarterly over the life of the franchise agreement. Royalty fees typically cover items such as updates to operating manuals, as well as ongoing support and other resources provided by the franchisor.
The fees paid by individual franchisees are also used to maintain all the current locations and keep the brand thriving and growing. The exact percentage you’ll pay, how often and whether the percentage can increase or decrease are detailed in Item 6 of a company’s FDD and in your franchise agreement.
- Advertising Fee: This fee is used to promote the franchise system as a whole, rather than just your location. Depending on the franchisor, advertising fees may be calculated as a percentage of your store’s gross or net sales, or they may be a fixed monthly amount.
Usually, the amounts collected go into a regional or national fund that’s used to pay for regional/national advertising campaigns, promotions or special marketing initiatives. Details about how a franchisor calculates and uses the advertising fees they collect are also found under Item 6 of the FDD.
- Additional Fees: The FDD may also include information on other fees charged by a franchisor. These can include a renewal fee that’s payable if the franchise contract is extended beyond the original term, or a transfer fee that’s charged if the franchise is sold to another party.
To learn more about the Signarama franchise opportunity, request our free franchise brochure today!