Franchise Fees: Beyond the Initial Investment
Advertising Fees / Marketing Fund
Some franchisors require payments into an advertising or marketing fund. The amount can be a percentage of sales or a flat fee, paid weekly, biweekly, or monthly. The fund may support national and/or local advertising; some companies require contributions for both. Advertising can involve TV/radio spots, print media, and/or printed materials, depending on the franchise, the age of the system, and the state of its market penetration. Sometimes the franchisee will have input as to to where or how funds are spent.
This type of franchise fee arises when the franchisor requires financial audits of its locations. Here, the franchisee may have to pay for the cost of the audit, especially if irregularities are found. Audit fees are common to most franchise agreements.
Franchise fees are paid to the franchisor to obtain the rights to the operating system of the business. This fee typically covers site selection assistance, training, marketing materials, and operations manuals. This is usually a one-time fee payable upon signing of the contract and is typically based on the number of units or territories purchased, or territory size.
To ensure quality control and uniformity, some franchisors require franchisees to purchase products from them. All details relating to these required purchases are explained in the FDD and/or the franchise agreement.
Most franchise agreements have a limited term (5 or 10 years) and do not automatically renew. When the term expires, the franchisor may require a fee in order to renew the agreement. Sometimes the renewal fee takes the form of remodeling or upgrades to the physical location of the franchise. At a minimum, most franchisors require franchisees to be in full compliance with the operating system to qualify for renewal.
The franchisee pays royalty fees in exchange for the ongoing right to use the franchisor’s brand/trademark and system. Often calculated as a percentage of gross sales, royalty fees can also be a fixed amount or based on other factors. They enable the franchisor to provide the franchisee with ongoing support and training, research and development, and building of the brand.
When a franchisor allows a franchisee to purchase an additional or non-standard territory, they may require a one-time fee for these rights. This fee is similar to the initial franchise fee paid for the initial territory.
Most franchisors include initial training in the franchise fee. Additional training, for the franchisee or staff, may also be available for a fee.
When a franchisee sells his franchise, the franchisor may require the payment of a transfer fee as a condition for transferring the franchise agreement to the new owner (franchisee).
To set yourself up for success, make sure you fully determine the financial commitment each franchise opportunity requires. With an understanding of these types of franchise fees, you’ll be better prepared and informed before you open your wallet.