There are many costs associated with a franchise, which are as important as picking a profitable business, and one such cost is the franchise fee. However, there is no standard franchise fee set in the market, which makes it more difficult to make a budget. This is where the concept of ‘Average’ takes into play and leads us to our next question: how much is the average initial franchise fee?
If you are also looking for the answer, then this is the perfect place for you to gain some insight into the franchise and the various costs associated with it.
Let’s begin the guide and understand what is franchise fee, how it is calculated, and how much is the average initial franchise fee.
What Is Franchise Fee?
An initial franchise fee is a one-time fee a franchisee pays to the franchisor to enter the entire franchise system.
In return, it gives you access to the franchisor’s brand and license to own and operate the business.
Simply put, when you pay the initial franchise fee to the franchisor, it transfers the particular rights of that franchise to you (the franchisee). This cost is not tax deductible and is considered as capital asset.
How Much Is The Average Initial Franchise Fee?
Every company has its specific franchising fees, so you may not see a standardized franchise fee in the market.
For example, the Subway franchise fee is $15000. On the other hand, the franchise fee of the Philly Pretzel Factory franchise is $35,000.
However, a franchising business has some common average costs associated with it.
On an average, initial franchise fee ranges from $25,000 to $50,000. These are also not a standard franchise fee costs, as they can increase or decrease based how well-established the company is.
That being said, the franchise fee should be considerable for the franchisees and not scare them off.
What Is Franchise Fee Used For?
Franchising is a win-win for both the franchisor and the franchisee. The franchisor gets the skills and expertise of the franchisee. In turn, a franchisee gets an established brand with brand recognition.
The initial franchise fee you pay has a purpose, which is to give you access to various features of the company.
This cost covers all the franchisor’s costs for providing the franchisee with the following resources:
- Training and support
- Branding help
- Assistance in advertising and marketing
- Access to technology and software
- Access to the operating manual
- Access to the brand’s internal business system
- Entry into the franchisee network
The initial franchise fees also cover aspects like audit and insurance.
How Is Franchise Fees Calculated?
As we discussed above, an average initial franchise fee cost ranges from $25,000 to $50,000, as long as you haven’t purchased a Master franchise.
Master franchises require you to purchase a large piece of land and selling of individual franchises in the same location. The initial franchise fee of this type of franchise can cost $100,000 or more.
To calculate this initial franchise fee, the franchisors calculate both the
- marketing fees and
- royalty fees using the monthly gross revenue of the business.
Also, the franchisors don’t use the amount of the revenue, but they rather use the percentage of the revenue.
What Is The Difference Between Franchise Fee And Initial Investment?
Franchise fee and initial investment are two terms that often create chaos among investors. However, they serve different purposes in the franchising world.
Starting with the franchise fee, it is a one-time payment that you pay to the franchisor in return for using the brand.
On the other hand, initial investment is a comprehensive figure. It encompasses a wider range of expenses. As per the rule of the Federal Trade Commission, a franchisor must describe a detailed breakdown of the initial investment in the structured tabulation.
The initial investment isn’t limited to initial stock, rent, security deposit, and branding essentials.
What Are The Fees Paid By A Franchisee?
Whether you are franchising a service business, franchising a restaurant, or you are just a franchisee looking to own a franchise there are a lot of cost associated with it. All these costs or fees are equally important to understand both for a franchisee and a franchisor.
Below are some costs other than the initial franchise fee that is also to be paid by the franchisee:
1. Ongoing Franchise Fee
After you have purchased the new franchise, you will have to pay the ongoing franchise fee to the franchisor.
This fee will be in exchange for:
- The support you get from the franchisor and
- Operating under the franchisor’s brand
The franchisor can charge a fixed fee weekly or monthly which will be charged as a percentage of the revenue. By this method, the franchisor ensures that they are also getting benefitted from the success of your business.
2. Training Fee
In addition to the ongoing franchise fee, a franchisor may also charge training fee which is sometimes included in the initial franchise fee.
The franchisor wants the new franchisees and the managers to attend an initial week-long orientation trainig program. For this reason the franchisee is bound to pay the training fee.
There might be additional costs also which the franchisor will give an estimate beforehand. These additional cost includes:
- Travel
- Accommodation
- Meals
- Cost of training provided by the third party
3. Equipment Fee
Depending on the nature of the franchise a franchisor might crage you for the initial equipment or the stock required.
These equipements will be directly provided by the franchisor and will belisted in the franchise disclosure agreement.
For example, the franchise you chose for is a mobile franchise which means that you will need to pay the equipment fee for the purchase of van or tolls required by the business.
4. Ancillary Cost
If you have opted for a franchise with physical premises, then you have the right to occupy and use these premises by paying an additional cost to the franchisor.
You may pay these costs as license fees, depending on the leasing agreement of the business. Also, it is common for the franchisor to assist you in the lease negotiation and enter the lease with the landlord themselves.
5. Other Upfront Fee
| Upfront Fee | Service |
|---|---|
| Project Management Fee | This fee is paid to the franchisor in consideration of the franchisor’s assistance to find and locate suitable premises for the franchisee. |
| Opening Promotion Campaign Fee | This fee is typically paid in consideration of the franchisor assisting the franchisee in launching the marketing campaign for the new franchise. The amount of this fee depends on the level of marketing and the level of involvement of the franchisor in determining the content and strategy to open the promotional campaign. |
| Site Selection Fee | This fee is typically paid in consideration of the franchisor assisting the franchisee to develop and launch the marketing campaign for the new franchise prior to launch. The amount of this fee will depend on the level of marketing and how involved the franchisor is in determining the content and strategy behind the opening promotional campaign. |
Can You Negotiate Franchise Fees?
Generally, franchise fees are non-negotiable payments due to the rules of Federal Trade Commison. The Federal Trade Commision states that any changes given to one franchisee will also be given to all prospective franchisees.
Therefore, most franchises will not provide you with any discount to avoid giving discounts to other franchisees.
Moreover, when all the fees in the franchise agreement are the same, it will become easy for the proprietary business to collect funds.
Negotiating the franchise fees will result in less uniformity and consistency for each business.
Conclusion
When franchising a business, it’s more than important to know all the cost associated with opening your own franchise.
This cost includes:
- Initial franchise fees
- Ongoing franchise fees
- Equipements fees
- Documentation fees
- Marketing Levy
- Training fee and
- Other upfront fees
Knowing all these fees will help you make an informed decision about the franchise business and will also help you to estimate your budget for owning the franchise.
But then again, every company has a different initial franchise fee; for this reason, the franchising world has set an average initial franchise fee that ranges from $25,000 to $50,000.
This cost can vary depending on the company you pick.
Overall, we hope this article gave you detailed information about “how much is the average initial fee?” to make an informed decision.
FAQs
Does franchise fee affects the profitability?
The franchise fee includes the marketing and advertising of the franchise. For this reason, it may improve profitability by bringing in more customers and increasing the revenue of the business.
Where can I find the initial franchise fee?
As per the rules of the FTC, the franchisor will disclose the initial franchise fee in Item 5 of the Franchise Disclosure Agreement.
Do I need a license to become a franchisee?
No, there is no specific license to become a franchisee. However, some franchise systems perform particular duties that may require you to get a permit or a license. You can acquire this license through the franchisor or by direct application to the licensing body.