Questions you’re dying to ask about franchise fees
Your mind is made up. After countless hours of research, meeting with your FranNet franchise consultant and weighing all the pros and cons, you’ve decided on a franchise that is right for you. Now you’ve only got to sign the contract, go through the training and pay the fees. But speaking of fees… maybe you’ve got a few questions.
Since a franchise is such a big investment, it’s important to ask any questions you have about these fees – and get answers. Here are a few common questions (and answers!) that new franchisees ask about franchise fees:
Q. What is an initial franchise fee?
A. This is the upfront amount you have to pay to join the franchise. It is usually a flat rate. Sometimes there is a discount in the initial franchise fee for veterans.
Q. How much are initial franchise fees?
A. It depends on the franchise. Some franchises can have fees of only a few thousand dollars while others have fees in the tens of thousands. In general, the average initial franchise fee is around $30K.
Q. What do I get in exchange for my initial franchise fee?
A. When you pay your initial franchise fee, the main thing you are paying for is the right to use your franchisor’s business system, name, brand identity and products within a specific territory or area. Some initial franchise fees also include some marketing to help you launch your new franchise.
Review your Franchise Disclosure Document carefully to see what your fees include. If you have any questions, be sure to ask before signing.
Q. Will I have to make additional investments in my franchise once the initial fee is paid?
A. Yes, besides the initial franchise fee there will be other costs involved. For example, you will most likely have to pay a royalty to your franchisor which can either be a percentage of gross sales or a flat rate. Often the higher the royalty is, the more established the franchisor. In general, the average royalty is 6% to 8% of gross sales.
You may also have to pay additional marketing fees, technology fees, or accounting fee. You might not have to pay any of these fees too. It all depends on the franchise. Then you need working capital to cover any build out and equipment, etc. Any business also has ongoing costs as well such as payroll and inventory too.
Q. How may I learn more about franchise fees?
A. The first place any new or potential franchisee should go to get information is their Franchise Disclosure Document. The will not only outline what you need to know about the fees of a specific franchise but also other important financial and historical information including any history of bankruptcy and litigation. In a Franchise Disclosure Document, section five will outline the initial franchise fee, section six will outline other fees, and section seven will outline working capital.
Q. Can I get financing to pay the initial franchise fee?
A. Yes and no That answer depends on how you want to finance your business. New franchisees have a number of financing options available to them including SBA loans, 401k rollovers as well as private loans. Your franchise consultant will be able to share a number of programs with you that you might be eligible for.
Having questions about franchise fees is of course very natural when you are investing a large sum of money into a business. It is important that you take the time to have your questions answered before you invest. Doing so will help give you the confidence that you have made the right choice – or – if any red flags are raised, it may encourage you to seek out another opportunity.