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Franchise Prospector » Money & Financing
Franchise Fees; What Do They Really Pay For?
Money & Financing
Today, many individual entrepreneurs are finding out that purchasing a franchise is an extremely wise investment. The process is enjoyable, the money is great and the promises are often followed through with by the franchisor. Despite all of this, however, there is one question that investors who have not yet joined will consistently ask - why does it cost so much, and what, exactly, will I be paying for?
Indeed, while joining a franchise is an increasingly popular route of investment for the entrepreneur eager to make his or her business a success, there are considerable initial fees which might catch some off guard. Still, the benefits - as well as the chances of success - are much greater than starting up an independent store or restaurant. The higher initial costs that come along with these advantages cover the standard initial franchise fee as well as the royalty fee that continues throughout the duration of the franchisee's ownership. In order for the investor to find out what is coming back, he or she should carefully read item 11 of the Uniform Franchise Offering Circular (UFOC) to see the benefits that are in place to account for the fees. (Just ask the franchisor for this packet if it has not already been given to you). By reading the straightforward description of what services the franchisor will provide, one can develop a clear idea early on of what he or she can get out of a franchise agreement. That is essentially how UFOC can ultimately help the investor make an informed decision.
Yet before the benefits are explained any further, it is important that the investor understand the nature of the fees that need to be paid when entering into a franchise contract. While it does not include the costs of getting the business going, the term "franchise fee" refers to the initial down payment that gives the franchisee rights to his or her store with the company name, rights to that name and a long list of other benefits that will be further discussed below. After the franchise fee - a down payment of sorts - one can expect to pay a regular royalty fee - continuing installments based upon the level of sales generated. (In certain instances there one may come across a different type of arrangement, although the royalty fee is typically the most common. Most of the time, this fee is paid every month although other payment plans are known to exist as well).
This royalty fee can be regarded as the cost of maintaining continued association with the company. It should be made clear, however, that these fees are just a portion of the total initial and ongoing costs associated with running a business. Other expenses such as advertising, supplies, payroll, property and many more items factor in to the total investment that a franchisee must be willing to commit to.
So, having determined how the franchise fees are paid, the natural question that follows is this: what, exactly, does the franchisee get by being part of a bigger organization?
Just as the fees are broken down into two parts - initial and ongoing - so are the benefits. That is to say, a company will provide its franchisees with a variety of services before the grand opening (and with many companies the grand opening ceremony itself is arranged in part by the franchisor) as well as continued services.
While the services and features differ widely between companies, the standard items offered by a franchisor usually include, as mentioned earlier, rights to the system - the franchisor's name, trademarked furnishings and design, marks of service and its system of operation. Yet in addition to these benefits, a franchisee is provided with access to in-house knowledge about the best way to manage the business. Here, the advantage to joining a franchise becomes clear; while many independent businesses spend years perfecting their strategy through the lessons of countless mistakes, franchisees can start off with time-tested methods of operation that are much more likely to succeed right away.
Other initial benefits may include on-site training, valuable information technology and software, grand opening consulting, and more.
Ongoing benefits usually come in the form of franchisor-sponsored support networks, consulting through group or individual sessions, advertising and up-to-date coaching on the franchisor's latest marketing innovations designed to help its franchisees succeed.
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