Being a franchisee has a lot of benefits. You’re a brand name people trust and you’ll already have a line of loyal customers at your door when you open. You’re in a heavily researched location proven to be successful for what you’re about to start selling and you have franchisors to help you train your new employees. But getting involved with a franchise isn’t cheap.
When you’re looking to invest in a franchise and become a franchisee, there are a lot of fees and requirements involved. One of the most talked about costs involved with owning a franchise is the franchise fee. At Rodney R. Hatter & Associates, we get asked about franchise fees a lot. So let’s take a closer look what a franchise fee is and what you need to know about it.
What are Franchise Fees?
To put it simply, a franchise fee is the cost of entry. It’s an amount you pay up front to basically guarantee yourself a store (or multiple locations) within the company. It’s your license to own and operate the franchise business.
Franchise Fee Costs
Franchise fees usually range from $20,000 to $50,000 (unless you’re considering a Master Franchise). The franchise fee depends on the individual franchise. This is not always public knowledge, but a few major fast-food franchises have made their franchise fees public.
- Taco Bell: $45,000
- Wendy’s: $40,000
- KFC: $45,000
- McDonald’s: $45,000
- Pizza Hut: $25,000
- Subway: $15,000
It’s important to remember that the franchise fee is different from the total upfront cost of buying into a franchise. You need to ensure you’re aware of all the upfront costs involved with the investment before settling on a franchise to buy.
Other Up-Front Costs
There’s a reason franchises require you to have a certain net worth. Sometimes the franchise fee doesn’t even make up half of the initial costs you’ll run into. One of the first costs you’ll encounter are professional fees, including hiring an attorney to review the contract and an accountant to look over the numbers.
Before you open, you’ll also need to consider the location. You may need to rent or build your own office, store, or restaurant location. Other franchises only make you pay for part of this, but it’s still a cost to consider. Then there’s the mandatory signs and landscaping and then all of the inventory and equipment. Some places will also make you pay for the initial marketing as well.
You’ll also have to purchase insurance and may have to invest in employee training. Some franchises have special programs you’ll need to participate in or make sure your employees have completed.
Related: The True Cost to Open a Franchise
What are the Other Franchise Fees?
Once you’ve paid the up-front costs, there are other fees to consider. These could be ongoing costs of owning a franchise, like paying interest on loans, purchasing supplies, paying rent and utilities, paying employees’ salaries and even maintaining the building and fixing problems that occur. Another initial payment is supporting the grand opening costs.
Most franchises also charge a marketing fee. This is usually 2-6% of gross sales. Even with a small marketing fee of 2%, that’s $500 a month if your monthly revenue is $25,000. That’s $6,000 a year, which isn’t all that cheap.
One of the most common ongoing fees you’ll pay as a franchisee is royalties. Let’s take a closer look at what royalties are, so you can get a better understanding of what goes into owning a franchise of your own.
Royalty payments are usually made monthly or quarterly. They make up a big part of the “financial relationship” between you and the franchise. It’s an ongoing payment that’s typically calculated as a percentage of gross sales.
Royalty fees are often seen as “membership fees,” sort of like monthly or annual payments to remain part of a country club. At first, this might seem a little bit unfair. You paid the up-front franchise fee. What gives? The royalty fees franchisors collect go towards corporate and franchise-related expenses.
The royalty fee that a franchisor collects from a franchisee will usually cover the franchisor’s expenses related to getting that franchise up and running. This includes training and advertising, as well as any costs related to the new location. These ongoing royalty payments are how franchisors make their money, not the franchise fee. This is the fee that allows them to further expand the franchise.
One major benefit of investing in a franchise over starting your own business from scratch is that support from the franchisor. This includes field consultants, marketing plans, business strategies, and employee training. All of this is supported through your ongoing royalty fee payments. So you can sort of look at royalty fees as a way to pay for the ongoing support that makes your location successful.
How Much Can You Expect to Pay?
Every franchisor will have their own method for ongoing royalty fee payments. The most common is a percentage of the gross sales you earn. This typically ranges from 5-9%. It’s usually a fixed percentage, but it can be increased or decreased depending on the amount of sales.
Some places will even require a minimum royalty payment, set by a percentage or dollar amount. There are some franchises that determine the royalty amount as a set dollar amount by default, keeping past sales in mind.
Investing in a franchise can be very rewarding. You are provided with a lot of support. There aren’t many startups that have advertisements and billboards being seen by millions of people all around the country. That brand name recognition provides you with loyal customers, waiting impatiently for you to open.
While owning a franchise is a smart move for many investors, you must remember that there are a lot of costs involved. One of the most commonly discussed up-front franchise costs is the franchise fee. We hope this article gave you a better understanding of franchise fees and what it takes to get involved with a franchise. If you have more questions about getting involved with a franchise, contact Rodney R. Hatter & Associates today. We’ll help you get started and support you along the way.
Related: 10 Benefits to Owning a Franchise