There are plenty of myths about franchising. A great deal of them revolve around money. I hear these two statements a lot:
“Franchise companies make most of their profits from franchise fees.”
“If it wasn’t for those franchise fees, I’d probably consider buying a franchise business.”
In this article, I’m going to teach you all about franchisee fees, including why you pay them and how franchisors make money.
What Are Franchise Fees?
They’re the cost of entry. Paying the upfront franchise fee unlocks the door to the franchisors’ proprietary business systems and more. You get the complete setup. The franchise fee is literally a license to own and operate the franchise business. That’s why you must pay it.
Franchise Fee Costs
Today’s franchise fees range from $20,000-$50,000, unless you’re considering purchasing a Master Franchise. (Master franchises involve purchasing a large geographical area and selling franchises in that area.)
The franchise fee for a Master Franchise can run $100,000 or more.
Important: Don’t confuse the franchise fee with the total upfront cost of the franchise business opportunity. The franchise you’re interested in possibly buying doesn’t cost $40,000. It costs $175,000 when you include everything you need to open for business. Always look at the total upfront investment when you’re searching for a franchise to buy.
The “Other” Franchise Fees
There are other fees associated with owning and operating a franchise business. These include marketing fees and royalties.
When you own a franchise, one of the things you’re hoping to capitalize on is the brand. Franchisors spend thousands of dollars every year to advertise their brand. As a franchisee, you’ll be asked to do your part, too, by way of a monthly marketing fee.
Franchise marketing fees are usually based on your monthly revenue.
For instance, if your average monthly revenue is $25,000, and the franchisor charges a 2% marketing fee, you’ll have to pay your franchisor $500. (That’s $6,000 annually.) That’s a lot of money.
But it’s only a lot of money if the franchisors’ marketing isn’t doing the job.
In other words, if you’re paying out $6,000 and you don’t feel-or can’t measure your return on your investment, it’s a problem. Good thing there’s is an easy way to find out if the marketing fees are worth the investment. All you have to do is ask the franchisees!
In other words, when you’re doing your research, make sure you ask the franchisees you talk to how good the marketing is-and if they feel their monthly investment is advantageous to their businesses.
There’s another fee you’ll be paying as a franchisee. It’s a royalty.
Franchise royalties are usually collected by your franchisor on a monthly basis. Like marketing fees, these fees are based on a percentage of your revenue. But there’s one major difference; the percentages are higher.
Franchise royalties range from 4% of your revenue all the way up to 12% or more. The amount has to do with the type of franchise business.
For example, a food franchise is a high-volume business. A lot of individual items are purchased by a high-volume of customers.
It’s not unheard of for a food franchise business to exceed $1 million in revenue annually. Because of volume, the franchise royalties are usually on the lower end of the royalty scale, percentage-wise.
Specifically, if you own a food franchise doing $1.5 million annually, and your franchisor charges a 5% royalty, you’d be paying $75,000 in royalties to the franchisor every year.
In contrast, if you own a business consulting franchise, the royalty percentage may be 10%, which does sound high. But you’re probably not doing $1.5 million in revenue like you would be if you owned a food franchise. You’re probably doing $300,000. And franchisors don’t have to invest as much in a consulting franchise as they do in a food franchise.
FYI: Monthly royalties are where the profits are for franchisors-not the upfront franchise fee, which is a one-time payment.
As shown above, franchise fees are a necessary part of franchising.
Both parties benefit from franchise fees, marketing fees, and royalties if the franchisor offers a good business system, and the franchisee follows it.
Article originally appeared on sba.gov.