Investing in a well-thought-out franchise business is the best decision you can ever make. It’s an opportunity for you to start your personal business without the worry of building up a personal brand reputation. You’ll enjoy the advantages of operating your business using your franchisor’s brand reputation. However, this also means that you’ll have to pay for these added benefits. Therefore, entrepreneurs need to learn more about franchise costs before investing in a franchise business. Below are the most common franchise fees that you should be aware of.
Before launching your franchise business, you need to budget for start-up costs. Start-up costs refer to the amount of money you’ll need to invest in your business before starting operations. After settling on a franchise idea, you’ll need to secure a business location, equipment, licenses and permits, inventory, payroll, employees, taxes, insurance, etc. Acquiring these resources requires you to invest a certain amount of money.
The amount of money you’ll need to invest depends on the type of industry your franchise business will operate in. In most cases, the start-up costs of franchises in the food and retail industry are higher than franchises in the service industry.
A franchise fee refers to the ‘cost of admission’ to operate your business using the franchisor’s business reputation, systems, and trademarks for a specified amount of time. The amount of the franchise fee varies from company to company. And these variations in costs are influenced by the benefit the franchise fee provides the franchisee.
For some, the franchise fee only covers the license to operate a business in the franchiser’s name. Other franchisers offer additional benefits such as training, location selection, and business operation support. Therefore, before selecting a franchiser, investigate what benefits their franchise fee provides.
Working capital refers to the cash required to run your business daily. Working capital will help you maintain and operate your business before becoming self-sufficient. The amount of working capital you set aside has to cover a certain length of time. Depending on the type of business and the industry you’re operating in, you could set aside a working capital to last you three months or even two years.
In most cases, your franchisor will provide you with an estimate of the working capital you need. However, it’s highly recommended that you conduct your research on the working capital you need. Your research should concentrate on the market rather than the industry’s average. Industry averages are at times incorrect since they don’t consider the size and location of your franchise business.
A royalty fee is another fee that franchisers charge as a percentage of your gross revenues. In most cases, royalty fees are charged monthly. However, other franchisers charge their royalty fees weekly. You should note that a franchiser’s profits are earned from royalties rather than franchise fees. The royalty fees of most franchises range between 4% to 12% of the gross revenue earned. However, a few franchisers charge a flat rate royalty fee.
The percentage rate that franchisees pay largely depends on o the type of business and the performance of the franchise. High revenue franchises are usually charged a low percentage. In contrast, low-revenue franchises are usually charged a high percentage. And that’s because, at the end of the day, the high-revenue franchise will still pay more in royalties than the low-revenue franchise. For example, if your franchise earns $1,000,000 and is charged 5% in royalties, you’ll pay $50,000. And if your franchise earns $200,000 and is charged 10% in royalties, you’ll pay $20,000.
Advertising And Marketing Fees
One important benefit of a franchise business is the amount of money and resources invested by franchisers to attract and retain customers through marketing and advertising. The marketing and advertising efforts of the franchiser make it easier for the franchisee to attract and retain customers. It also ensures that the franchisee concentrates their efforts on running the business instead of looking for customers.
The franchisee has to pay for the advertising and marketing costs for these benefits. The fee usually ranges between 2% to 5% of the franchise’s gross revenues in most cases.
The above fees are the most common franchise fees. However, they’re not the only franchise fees. Franchisers have different fee structures. Therefore, you must carefully read a potential franchiser’s Franchise Disclosure Document (FDD) to identify their fee structure. If you have any further questions, leave them in the comment section below.