Many business people decide to start a small business by purchasing a franchise. Buying a franchise is a big investment, of course, and the process can be complicated. Naturally, one of the first steps is to find the franchise that's right for you, and there are thousands of them, ranging from fast food restaurants to car repair shops.
At the heart of the "which franchise" question is, how much is the franchise fee, and what exactly do I get for it?
General Fee Issues
There's no general, uniform formula for franchise fees. The fee is determined by the franchisor--the person or company who owns the product, service, or system that you're buying. So, the fee will depend on the particular franchise you're looking to buy, and they can vary greatly.
Generally, franchise fees range between $10,000 and $50,000, with fees at the higher end of the range being charged by well-known businesses, like fast-food restaurants. Some franchise fees are even higher.
The franchise fee is an up-front, one-time fee that you're charged at the very beginning of the process. Generally, it's due at the time you sign the franchise agreement. Also, it's common for the franchisor to require at least a portion of the fee to be paid in cash, and then to let you finance the remaining balance, that is, pay off the balance over time, with interest.
Finally, you should know that the franchise fee is usually non-refundable, so unless the franchise agreement states otherwise, you won't get the fee back under any circumstances. It's not uncommon, though, for a franchise agreement to allow for a refund if you decide to cancel the deal with a certain period of time, usually 30 to 45 days after you sign the agreement.
What Do You Get?
Technically, 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. But, almost every franchise agreement will specify a number of things that you'll get once you pay the fee and join. Of course, these things can vary depending on the type of franchise and the generosity of the franchisor, but in general your franchise fee will get you:
The right to use the franchisor's system or product, including the franchisor's trade name, trademarks, and service marks--like a restaurant chain's name and trade secrets, the franchisor's operating manual or recipes, and any computer software or system that's necessary for using the franchisor's system or selling its product.
Assistance 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. For example:
- To protect other franchisees, the franchisor might help you find a location within a specified geographic area of its choosing, that way you don't compete with another franchisee
- The franchisor might require you to buy a certain kind or brand of equipment and then help you find a supplier of that equipment, or it might give you a list of suppliers that you are required to use for any supplies
- Training for you and your employees (including managers and supervisors) on how to use the franchisor's system or product
- Promises that the franchisor will keep you informed of and make available to you any improvements or changes to the franchisor's system or product that might happen after you've signed the agreement, and will provide continuing training for you and your employees if required by any change or improvement.
- Assistance with learning how to manage and operate the franchise successfully, such as advice on personnel placement, marketing and pricing, as well as advice on holding a "grand opening" event
Importance of Franchise Agreement
The franchise agreement is crucial with respect to what you get in exchange for your franchise fee. Just like any other contract, the franchisor is only going to give you (and you're only entitled to get) what's specified in the franchise agreement. So, if the franchisor made promises about giving you something at the outset to help you get up and running, make sure it's in the agreement. It might be a good idea to have an experienced business law attorney review the agreement before you sign it and pay your franchise fee.
Questions for Your Attorney
- How much negotiation is possible when discussing what I'll get once I pay my franchise fee?
- Another franchisee just told me that her franchise fee was less than the franchise I had to pay, even though we both dealt with the same franchisor. Can a franchisor charge different fees?
- My franchisor is requiring me and my employees to attend a two-day training session in another city, and it refuses to pay any of the costs for our travel and lodging. Can the franchisor do that?
- I have a reliable source that told me that my franchisor made significant changes to the system that make it much more efficient and profitable, but I haven't been given access to it. I think it's because the franchisor is waiting until our agreement expires and then, when it offers me a renewal, it will give the improved system but then increase my royalty payments. Is that legal?