Many business people decide to start a small business by purchasing a franchise. Buying a franchise is a big investment, and the process can be complex. Naturally, you start with finding the right franchise business for you. Franchise types range from fast-food restaurants to service providers, such as car repair.
At the heart of the "which franchise" question is, how much is the franchise fee, what are the royalty fees and what do these fees cover?
General Fee Issues
There's no single franchise fee formula. The franchisor, the person or company selling you the franchise, sets the fees. Fees can vary greatly.
Generally, franchise fees range between $10,000 and $50,000. Fees at the higher end are common with well-known businesses, like fast-food restaurants. Some franchise fees are even higher.
The franchise fee is an up-front, one-time fee charged at the very beginning of the process. Generally, it's due when you sign the franchise agreement. A cash down payment is common, with a loan financing the balance.
Finally, you should know that the franchise fee is usually non-refundable. Unless the franchise agreement states otherwise, you won't get the fee back under any circumstances. However, your franchise agreement may provide a refund if you decide to cancel the deal with a certain period, usually 30 to 45 days after you sign the agreement.
What Do You Get?
The franchise fee is the cost of joining the franchisor's "family" or "club," and that's it. You get nothing for it except membership or affiliation. Your agreement should specify a number of things that you'll get once you pay the fee and join. Terms vary, but generally, your franchise fee covers:
The right to use the franchisor's system or product. This can include the franchisor's trade name, trademarks and service marks. Examples are a restaurant's trade name and secrets, such as recipes or computer software systems.
Start-up support. This covers help with things like site selection, shop or building construction and layout, equipment selection and finding business signs. Many times, the franchise agreement will give the franchisor some or complete control over these items. Examples include geographic location, equipment, supplies, employee training methods, continuing training and consulting as you get your franchise up and running.
What Are Royalties?
Royalty fees are another franchise fee type. Your contract will provide for "continuing fees" or "continuing royalties," made over the life of the franchise contract. Royalties are a key element when you're looking at a franchise or negotiating your contract. They impact your ongoing business operations, so make sure you understand them.
You pay royalty fees to the franchisor periodically. Your contract states how much you'll pay and when. Typically, these fees are tied to your sales of goods or services, for example a percentage of your sales. Payments may be due weekly, monthly or quarterly. Fixed fees are another option, or sometimes a hybrid of these methods.
What Do Royalties Cover?
If you look at your franchise fee as the cost of joining the franchisor's business family, royalty fees are akin to the cost of staying in the family. Your contract may vary, but royalties often cover items such as:
- Ongoing training
- Updates to operating manuals
- Ongoing advertising and promotions
- Sales to your business of goods or services directly from the franchisor
- The franchisor's ongoing consulting to help you run your business
Your Franchise Agreement and Keeping Records
Most franchise agreements require you to keep various books and records as the basis for calculating and verifying your royalty fees. Periodic sales reports are usually required, such as weekly, monthly or quarterly. An annual report is usually required, too. The franchisor may have a specific forms or formats for you to use.
You'll probably be required to keep your records for a certain number of years, and agree to allow the franchisor examine or audit your books.
The franchise agreement will usually cover how any discrepancies are handled, such as an underpayment of royalties. There may be terms on how and when shortfalls must be paid, and whether any interest will be charged. Likewise, terms covering overpayment of royalty fees should be covered in your contract, such as an immediate refund or a credit to your account.
Terminating your franchise is another term to be found in your contract, for causes such as not paying your royalty fees or complying with other terms.
Questions for Your Attorney
- Can a franchisor make me pay for the costs of examining and auditing my books?
- My franchisor wants access to my business bank accounts so that it can automatically deduct my royalty payments. Should I give the franchisor access to my accounts?
- Can my franchise agreement be modified?