Although there are other fees involved in the franchising purchase process, franchise fees are generally considered the cost for purchasing the rights to operate and run the franchise unit. However, there are other types of franchise fees, like:
Depending on the type of franchise business operation you have chosen to pursue, your franchise fees might vary.
Despite the fact that every franchisor charges different fees for the rights to a franchisee to run a unit, a franchise fee package will, in most cases, cover the provision by the franchisor to the franchisee of an operations manual, the rights to use the company’s brand name and logo, expert advice and business guidelines, practical training, a start-up package (this may include equipment, uniforms, stationery, products, shop fitting, etc.).
Other things that a franchisee may cover includes location selection and assistance with lease negotiation, site build assistance, access to suppliers, employee recruitment and training, store launch and grand opening and startup marketing packages.
A clear distinction should be made between an initial franchise fee and ongoing franchise fees. Simply put, the initial franchise fee is paid once at the start of the franchisee’s business relationship with a franchisor.
However, there may be exceptions to this rule and this comes into play when a franchisee has already finished their contractual period and wishes to renew it. These renewal franchise fees can be the same amount as the initial franchise fee, a lower/discounted amount or there may be no renewal fees charged at all.
Apart from the initial franchise fee, a prospective franchisee should consider the total capital investment and ongoing franchise fees such as royalty payments and marketing and advertising costs.
There is no simple formula for calculating your franchise fee. In most cases, this fee is determined by the franchisor who would have taken multiple factors into account. These factors include the value of the brand, the business’ market valuation, potential for profitability and returns on investment, the total costs for market research split across a number of franchisees which are absorbed into the franchise fee and others. Overall, in the UK, determining the cost of the franchise fee will also depend on the location of the franchise, the legalities involved and the industry in which the franchisor is operating.
Every franchisor charges a specific initial franchise fee for their business opportunity. There are low-cost, medium-cost and high-cost investments. For example, in the UK, you may find that on average, the initial franchise fee could be anything between £10,000 and £200,000 although there are some franchisors who require a much larger investment that can go beyond £5 million.
Franchise fees which are charged on an ongoing basis are typically royalties and marketing and advertising, technology, and other fees. Royalties are usually the largest chunk of the regular fees a franchisee is required to pay a franchisor. These fees can either be a percentage of the monthly sales/revenue/turnover or a fixed monthly fee. On average, and if considering the percentage royalty payments, you could be looking in the region of 7%, although once again, this will differ from franchisor to franchisor.
Many prospective franchisees wonder if franchise fees are negotiable. Since the franchisor is in a relationship with multiple franchisees at the same time, the chances are that the franchisor will want to be fair to everyone. Therefore, in most cases, initial franchise fees are non-negotiable.
However, a franchisor may, for example, start a “Founders Club” when launching their franchise. This means providing a discount on the initial franchise fee for the first five to 10 franchisees.
In addition, when it comes to whether royalty fees are negotiable, the straightforward answer is that they typically aren’t. Prospective franchisees should double check their franchise agreements and speak to a professional to determine if there is any room for negotiating any of the fees that are set out in the agreement.
When entering into a franchise agreement, franchisees are obliged to pay franchise fees. This is a non-negotiable obligation that must be adhered to, whether it’s the initial franchise fee or the ongoing royalty and marketing payments. Failure to pay these fees means that the franchisee will be in breach of the franchise agreement and could face legal ramifications from the franchisor.
In addition, although some franchisees may be dissatisfied with their franchisor and wish to withhold their payments as a sign of protest, this is a highly undesirable situation and could result in legal action against the franchisee. Therefore, irrespective of whether you would like to send your franchisor some type of message, you should never take this route, always pay your fees and use proper dispute resolution channels and procedures instead.
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