Franchise Costs: What to Expect from Initial and Ongoing Franchise Fees
When you research franchise opportunities, you’ll likely hear a lot about the fees brands charge their franchisees. This isn’t done for no reason. In fact, each of those fees have a specific purpose and contribute to your experience as an investor.
Before purchasing a franchise, it’s crucial to understand the fees associated with it. Learn some common franchise costs when you’re getting started and the ongoing commitment.
OK, BUT WHY ARE THERE FEES?
It may seem unfair, but all franchises charge fees. Common fees you’ll see are your initial franchise fee, royalty fees, ad royalty fees, and even territory fees. When you boil it down, franchisees pay these franchise costs in exchange for ongoing support from the franchisor.
As you review the franchise investment costs for various brands, you’ll notice that most of the time the fees are listed as a percentage. Instead of charging a set amount, franchisors will charge a percentage of your sales for the month. This allows for new franchisees who are just getting their businesses off the ground to only pay a small amount while still maintaining the rules of their agreement.
INITIAL FRANCHISE FEE
The initial franchise fee is a larger amount that must be paid upfront in order to continue the process of opening a franchise location. Think of this fee as a cost of entry. Once this one-time fee is paid, you get access to the franchisor’s proven business model, their brand name, and an entire team of industry professionals who will help you as you open your location.
For most franchises, this fee is non-refundable. So, if you, for whatever reason, decide you cannot continue with opening the franchise location, you won’t get these funds back – unless stated otherwise in the franchise agreement.
The initial franchise fee could range anywhere between $20,000 and $50,000. However, some franchisors may charge more. It’s important to fully understand what you’ll receive in exchange for your franchise fee. Don’t be afraid to ask the franchisor directly.
Unlike the franchise fee, royalty fees are paid on a monthly basis. These royalties are meant to cover the cost of the operational systems, training, and support franchisees are able to use for the life of their agreement. An advantage of franchising is you, as the franchisee, have a dedicated team from headquarters to help you as you get your business started and beyond your first day open. Also, many franchisors have vendor relationships that allow their franchisees to get supplies and inventory at a negotiated rate. All of these services and perks of franchising are paid for by the royalty fees.
A sub-set of royalty fees that you may also need to pay throughout your franchise agreement are ad royalty fees. These are typically less than the royalty fees, but these are used for a specific purpose. These funds are paid to the franchisor to pay for research and product development. However, the majority of those fees go toward the creation and implementation of marketing materials that drive traffic to the franchisees’ locations. Marketing assets the franchisor produces include billboards, commercials, social media creative, and more.
Some franchisors do require their franchisees to spend a certain amount of money on local store marketing – this is also referred to as an LSM fee. This type of fee is a little different because it’s not collected by the franchisor, but instead is required by them to ensure franchisees are actively engaging their local communities.
Sometimes territory fees are included in the franchise fee, sometimes franchisors call them out separately. The point of a territory fee is to lock in your location’s territory which is where you business is allowed to operate. Franchisors tend to offer their investors protected territories, meaning you won’t be too close to another franchisee. However, it’s not guaranteed that the franchisor your researching offers exclusive territories, so it’s best to ask when meeting with them.
Your territory size is determined by the franchisor and is typically mapped out by how many people within your target audience are in the area. A reputable franchisor should not give you a territory that doesn’t have enough potential customers for you to run a successful business.
GOLD STAR: A PLATINUM LEVEL PARTNER
Founded in 1963, we’ve been franchising since 1966. We’ve had decades of perfecting our business model and are now a household name in Cincinnati.
Gold Star franchise startup costs range between $496,000 – $1,003,500, which includes our $30,000 franchise fee. Franchise candidates should have a net worth of $750,000 and at least $125,000 in liquid assets. Our ongoing franchise costs do consist of a royalty fee of 5% and an ad royalty fee of 4%.
To learn more about our franchise opportunity, fill out this form, and one of our representatives will be in touch.