The franchisor is legally required to ensure this information is as accurate and complete as possible so prospective franchisees can make informed decisions. Explanation What is an Initial Franchise Fee? An initial franchise fee refers to the amount of money you pay to the franchisor when you sign your franchise agreement.
Fees vary by organization and typically reflect the size and scope of the franchise you're buying. The payment of a flat, one-time initial franchise fee defines your business as a franchise of the parent organization and makes you a member of that franchise's business family.
Requiring a franchise fee is one of three elements your new business must meet to qualify as a franchise. The FTC identifies your business as a franchise if your arrangement with the franchisor meets the following criteria: As the franchisee, you're granted the right to operate a business and provide goods or services associated with the franchisor's trademark and other proprietary systems. The franchisor promises to exert a significant degree of control over the way your business operates or provide significant assistance in the way you operate your business.
In most organizations, the initial franchise fee covers more than the cost of admission. Typically, this payment includes the cost of your application and entitles you to use your franchise's branding and business plan. It can also cover costs related to startup training, marketing, advertising, and any other support you receive from the corporate team to establish your new business.
What are Ongoing Franchise Fees? The type and number of ongoing franchise fees vary for each organization. You pay ongoing franchise fees on a regular basis as long as you remain part of the franchise system. The most common types of ongoing franchise fees include: Royalty fees Franchisors typically calculate a royalty fee as a percentage of your gross revenue.
Some franchise royalty fees aren't variable. Instead, they're set as a fixed amount that you owe no matter how much money you make. Depending on your franchise agreement, you may have to submit this payment on a regular schedule that can be weekly, monthly, or at another predetermined interval. Regardless of how they're calculated, royalty fees represent the primary source of profits for franchisors. Royalty fees also finance your franchisor's efforts to expand and recruit new franchisees.
Like royalty fees, advertising fees are paid on a regular basis and may be set as a constant amount or an amount that corresponds to your gross sales, though typically at a lower percentage than royalty fees. The franchise system is based on uniformity for all. You must fit into the franchise system — not the other way around.
The typical franchise agreement is a boilerplate contract. Lawyers refer to them as contracts of adhesion. This means that terms are standard and not typically negotiated. If you are an existing experienced franchisee it may be different — you might be able to negotiate a special franchise fee.
Each company sets its own fees. Sometimes you will see fees expressed in a variable formula, such as X dollars per number of consumers in a territory. Nonpayment of franchise fees has serious consequences. You could lose your franchise business or be subject to other legal action.
Sometimes franchisees become unhappy, feeling they are not getting sufficient support and assistance. As a franchisee, you may want to withhold royalty fees to express displeasure or try to force changes. According to the law firm of Garner, Ginsburg and Johansen, P. Franchise fees are any amounts the franchisee must pay to the franchisor in order to operate a franchise.
These are usually a combination of once-only and ongoing payments. Most franchise fees are not negotiable. All rights reserved. Share on Facebook. Share on Flipboard. Share on LinkedIn. Share on Pinterest. Share on BizSugar. The usual contract is a template that is standard and non-negotiable.
As you research franchise possibilities for your entrepreneurial adventure, there will be many levels of franchise fees within your overall budget. With federal oversight and required disclosures, your franchise fee will open the door to a recognized and proven brand with the support and expertise that you can use as a roadmap to franchise success. Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture.
She has authored hundreds of articles for publications including AllBusiness. Reach out via her website for more on where corporate culture, communication, and human architecture collide. Sign up here to get the latest franchise opportunity updates and more delivered directly to your inbox. Be the first to know!
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