Eager entrepreneurs and investors stuck between a rock and a hard place when it comes to franchise investment often don’t know where to turn for answers. The privilege, the thrill, and the promise of owning a franchise is attractive and exciting; however, potential franchisees must know and understand the risks and opportunities of the franchising process before investing. Read on to discover the most frequently asked questions and answers regarding the initial franchise fee.
What Is Franchise Fee?
The initial franchise fee is an upfront payment a franchisee must make in order to purchase a franchise. This payment allows the franchisor to reimburses their set-up costs, transfer technology to the franchisee, and provide support, signage, training, and continued guidance to the franchisee.
How Much Does the Franchise Fee Cost?
The amount of the franchise fee varies depending on the franchisor, the type of business, the size of the territory, and other factors. However, to give you an idea of what to expect, the median initial franchise fee in 2020 ranges from $18,000 to $30,000. The median initial franchise fee for larger franchise systems is typically closer to $18,000. Keep in mind that the franchise fee is just the start of your investment, and other expenses such as equipment or inventory and working capital will be part of the overall investment.
What’s the Difference Between an Initial Franchise Fee and an Ongoing Royalty?
The initial franchise fee is a one-time payment a franchisee must make to purchase the franchise. An ongoing royalty is also due from a franchisee to a franchisor. This ongoing payment, which is usually a percentage of gross sales, is typically charged on a monthly or quarterly basis. The purpose of royalty payments is to cover the franchisor’s costs for ongoing support, marketing efforts, and management of the franchise network.
How Soon Do I Need to Pay the Franchise Fee?
The terms of franchising agreements vary according to the franchisor; however, most franchisors require the initial franchise fee to be paid within a certain time frame before the agreement can be executed. Make sure you review the agreement and understand when and how much will be due. The length of the agreement between the franchisor and franchisee may also play a role in when you are required to pay the fee.
What Does The Franchise Fee Cover?
The franchise fee covers a variety of costs that would otherwise be incurred by you as an investor. These include rebranding or signage costs, franchise training, and ongoing support. Some franchisors also provide their own financing options, allowing you to roll the initial franchise fee into the overall cost of the franchise investment, such as equipment and inventory.
What Is A Good Franchise Investment?
Before making a franchise investment, make sure you have done your research. Consider your business goals, your industry experience, and the franchisor’s track record of success. Make sure that the fee is reasonable and that you have the support and guidance of a qualified franchise broker before proceeding.