Guide To Starting A Franchise

4. Average Franchise Fees: What are They?

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Running A Business

Average Franchise Fees: What are They?

May 26, 2023 • 6 min read
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      As an entrepreneur, opening a new franchise location or taking over an existing one can be a fruitful endeavor that yields a great return on investment (ROI). However, without the right budget, franchisees may find themselves overextended and unable to fulfill their contractual obligations, leading to legal issues and a potential loss of their business.

      To ensure your budget covers all of its necessary expenses, it’s important to understand what the typical franchise fees are and how much they will cost you. Here’s what you need to know.

      What is a franchise fee?

      Franchise fees are payments made by a franchisee (a person who owns and operates a franchise location) to a franchisor (the franchise owner) for the rights to operate a franchise. A franchisee is required to pay various franchise fees to continue operating their business, including both initial franchise fees and ongoing franchise fees. By paying these fees, franchisees are legally licensed to use a brand’s operating system, name and logo, trademarks, and products or services. 

      The Franchise Disclosure Document (FDD) lists the average franchise fees a franchisee must pay. Generally, these fees are non-negotiable due to regulations enacted by the Federal Trade Commission and would require any changes made for one franchisee to apply to all prospective franchisees—meaning others are entitled to the same re-negotiated terms.

      If payments are missed, a franchisee may no longer receive support from the franchisor, leading to financial loss. Further, failure to pay franchise fees can result in a breach of contract and lead to legal action—or ultimately, a termination of the franchise agreement. In this instance, you could talk to the franchisor to find a solution—such as requesting a suspension of payments until sales improve—and consider enlisting the help of a lawyer.

      Five fees you can expect to pay as a franchise owner.

      New franchisees should expect to make both one-time and recurring franchise payments. Here are five typical franchise fees you can expect to pay when starting your franchise.

      1. Initial franchise fees.

      When a franchisee opens a new franchise location, or ownership of an existing franchise is transferred to a franchisee, they are typically expected to pay an initial franchise fee as a cost of joining the franchise’s “business family.” Franchisees pay this one-time fee to the franchisor at the time of signing to cover the cost of the initial investment, allowing the franchisee to own a location under the parent organization. 

      The initial fee—which, on average, ranges from $25,000 to $50,000—covers the costs of the application and vetting process, as well as training services, national advertising, and any additional assistance that can help ease the onboarding process for the new franchisee. Once paid, a franchisee receives authorization to use the franchise’s business plan, trademark, operating system, and branding/intellectual property.

      2. Startup costs

      At the onset of any new business, an entrepreneur will incur start-up costs. These fees may include expenses, such as replacing or purchasing required equipment, real estate purchases or leases, general office and administrative supplies, signage or decorations bought for the business, and the upfront purchase of inventory.

      Start-up costs range from $20,000 (for low-cost, small-scale franchise businesses) to upwards of several million dollars for larger businesses, depending on the type of franchise and its respective industry. On average, franchisees can expect to pay around $150,000 in start-up costs.

      3. Royalties

      Franchisors require franchisees to make ongoing royalty payments to use the franchise’s name and intellectual property. These typical franchise fees—made regularly, quarterly or monthly—are generally calculated based on a percentage of the revenue made in a given time. However, some agreements require fixed-price payments in a tiered system instead, allowing franchisees to earn more from increased sales without owing a higher amount. The specific terms of the payment will vary based on the agreement and can be found in the FDD.

      Franchise royalties are generally the payments a franchisee will make most frequently, so before signing any contracts, ensure the agreed-upon amount is fair to ensure you will remain profitable.

      4. Advertising and marketing fees.

      Because franchisors handle the assets and promotional responsibilities for the brand, franchisees are responsible for paying ongoing advertising and marketing fees regularly. These fees generally come at a rate ranging from 2% to 5% of a franchisee’s gross revenue and are paid to the franchisor to compensate for the marketing support that they provide to franchisees, including the development of assets and campaigns, along with brand recognition the company holds. 

      5. Other franchise fees.

      When opening a new franchise location, a franchisee can expect to pay fees to legal professionals, such as franchise attorneys, business accountants, and licensing agencies. A franchise attorney will review the FDD and confirm you are signing an acceptable deal, and a business accountant can ensure your books are set up properly and you’re paying the necessary fees and taxes. 

      Additionally, a new business has to make tax payments and hold insurance, so franchisees should factor these costs into the total budget when considering opening a franchise.

      Other fees may apply to franchisees to cover the cost of technology development or the implementation of software; these payments are generally made monthly. To determine what other franchise fees you may be responsible for, reference Items 5 to 7 in the FDD.

      Buying a franchise can be profitable, but it’s important to understand the franchise fees, including initial and ongoing payments, like startup costs, royalties, and advertising fees. Failure to pay these fees can lead to legal issues and loss of the franchise. Do your due diligence and consult professionals to ensure the fees are fair and sustainable for your business.

      About the author
      Sean Peek

      Sean Peek has written over 100 B2B-focused articles on various subjects including business technology, marketing and business finance. In addition to researching trends, reviewing products and writing articles that help small business owners, Sean runs a content marketing agency that creates high-quality editorial content for both B2B and B2C businesses.

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