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When considering a franchise opportunity, the franchise fees significantly impact a prospective franchisee’s decision to invest. The level of investment franchisees will owe varies across franchises and can depend on factors such as start-up costs and how they will operate the franchise. This article breaks down the costs of buying a franchise, explains what each cost covers, and several additional expenses prospective franchisees should factor into their investment calculations.
What Does it Cost to Set Up a Franchise?
When evaluating a franchise opportunity, one of the most crucial factors that potential franchisees must consider is the franchise fees. Franchise fees are the upfront costs that franchisees pay the franchisor in exchange for the right to use the franchisor’s brand name, business model, and access to the franchisor’s operating systems.
The franchise fees also usually cover the initial set-up, the franchisor’s intellectual property rights, and the provision of the initial training program and ongoing support. These fees can vary significantly depending on the franchise. The total of the franchise fees can depend on factors such as:
- the type of business it is;
- the size of the franchise network; and
- whether you operate from a brick-and-mortar store, are mobile, or based online.
The types of costs franchisees will pay to the franchisor to set up and run their franchise include:
- the initial franchise fee;
- royalty fees; and
- marketing fees.
Discover the key legal and commercial issues to consider when buying a franchise.
Breakdown of Costs
The following table explains each cost involved in buying and operating a franchise. Bear in mind that the types of fees can vary across different franchises.
| Type of Cost | Explanation |
| Initial Fee | The initial franchise fee is a franchisee’s first investment into their new business. The initial fee covers the costs such as: + setting up the business unit; + purchasing initial inventory; + obtaining rights to the franchisor’s intellectual property; and + delivery of the initial training program. Beyond the initial fee, there may be additional start-up costs for other supplies and equipment. |
| Working Capital | Beyond the initial investment, you may need to continually invest working capital into your franchise until it becomes profitable. You can use this to pay your employees, suppliers, and additional overheads. |
| Royalty/Management fees | Franchisees typically pay management or royalty fees to the franchisor, often monthly. Franchisors charge these fees at either a fixed profit percentage or a fixed monthly rate. This fee pays for aspects such as the franchisor’s support, continuing use of their trademarks, and franchise network maintenance costs. Check how the franchisor will calculate these fees, as this can significantly impact profitability. |
| Marketing Fees | The franchisor may require you to pay marketing fees on an ongoing basis. These fees contribute to the cost of promoting and advertising the franchised brand. Besides contributing to whole-brand marketing, you may also pay marketing fees for your unit or area of operation. |
There may also be additional costs to consider besides start-up and operating costs. For example, you may owe a resale fee to the franchisor if you sell your franchise. Franchisees may also owe a renewal fee to the franchisor upon renewing the agreement. Not every franchisor will charge a renewal fee.
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How Do I Know What Fees I Owe the Franchisor?
The franchisor should detail all the fees you must pay within the franchise agreement. Make sure you read and understand this document in its entirety. Understand the costs of the opportunity and decide whether you have the capital to invest. Furthermore, consider the ongoing costs and whether the venture will be profitable in the long run.
Insurance costs, legal fees, and fees for additional professional services such as accounting are further costs franchisees can factor into their investment calculations. Seeking professional legal advice at this stage can prove invaluable to prospective franchisees. A lawyer can read through the franchise agreement and advise whether investing in the franchise will be a good business decision.
Key Takeaways
When considering purchasing a franchise, you must consider various costs. These can include the initial fee, additional startup costs and ongoing royalty and marketing fees. Further expenses you can factor into your potential investment include fees for professional services, such as legal advice, and having a pot of working capital.
Before signing a franchise agreement, you should determine the initial and ongoing fees you will owe. Balance this with the potential profitability of the franchise opportunity to establish whether the franchise will likely succeed. Remember how the franchisor calculates your ongoing royalty fees can impact your net profit. The franchisor should detail its method within the franchise agreement.
If you need help joining a franchise or assessing a franchise opportunity, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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