The initial franchise fee that a franchisor requires as an upfront payment at the start of the establishment of the franchisor-franchisee relationship will vary in every case. However, some of the most common costs that are covered are:
The initial franchise fee is calculated based on multiple factors and there is no single formula used industry-wide. The franchisor will calculate this fee based on the industry they’re in, their market share and the value of the brand, what the business is valued at, a share of the costs for conducting market research, the potential for profitability and ROI, initial training costs and ongoing support, establishment and set-up of the franchisee’s operations, access to the owner’s manual and the time and resources it took to create it, amongst other things.
While there are franchises that are considered low-cost and which require an initial franchise fee of less than £10,000, there are many other opportunities which go above £40,000 and can reach into the millions.
When considering the initial investment for a franchise through the initial franchise fee, it must be noted that in some cases, it will include an ongoing royalty fee although there may be instances where the royalty fee is charged separately on a periodic basis as either a percentage of earnings or a fixed lump sum.
Initial franchise fees are generally paid upfront when the franchise agreement is signed and before the franchisee begins business operations. One of the likely reasons for this is that the franchisor would need to secure the franchisee’s interest and ability to take on the franchise unit. Therefore, the critical information such as the operations manual is usually only provided once the initial franchise fee is paid and the franchise agreement is signed.
There are differences between the initial franchise fee vs total investment. The franchise fee is a fixed amount that the franchisor requires in order to grant the franchisee the rights to operate under their name. The total investment, on the other hand, can be higher and go up to 40% or 50% more than the franchise fee. his is because it will include additional costs and expenses to be incurred for the start-up of their franchise operations such as building, equipment, products, rent, utilities and other expenses.
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