Buying a franchise is an investment. But, beyond your initial franchise fee (and potentially other startup expenses), as a franchise owner you are likely to incur a number of other ongoing costs that you would not have to pay as an independent business owner as well. So, how much does it really cost to own a franchise?
Additional Costs of Franchise Ownership (vs. Owning an Independent Business)
The following are all examples of fees and costs that franchisees may be required to pay their franchisors:
1. Initial Franchise Fee
The initial franchise fee is an up-front, one-time payment that is typically due at the time of signing or within a specified period of time (such as 30 days) after signing the franchise agreement. Initial franchise fees vary from one franchise system to the next, but are usually somewhere in the range of $15,000 to $30,000.
2. Lease, Branded Products and Other Startup Expenses
In some systems, franchisees may be required (or have the option) to lease their facilities from their franchisor, and they may be required to make an initial purchase of branded products and various other mandatory purchases as well. When leasing or purchasing from a franchisor or a designated supplier, it is critical to ensure that you are paying fair market value – which will not always be the case.
3. Royalty Fees
Royalty fees are typically calculated as a percentage of the franchisee’s gross revenue, although there are some different royalty structures out there (such as flat monthly royalties or percentage royalties with monthly minimums). As a franchisee, understanding the financial impact of your royalty obligation is essential to accurately assessing the profit potential of your franchise.
4. Advertising Fund Contributions (or Marketing Fees)
Advertising fund contributions (also called “marketing fees” and various other terms) are akin to additional royalties. Theoretically, the franchisor is supposed to use advertising fund contributions for the benefit of the franchise system as a whole. However, if you read your franchise agreement closely, you will see that you are not guaranteed to see any benefits from your advertising fund contributions.
5. Mandatory Purchases
Along with an initial inventory of branded marketing materials and supplies, some franchisors will impose ongoing mandatory purchase requirements as well. These can involve purchases from the franchisor directly, from one of its affiliates or from a designated third party.
6. Mandatory Upgrades and Modifications
As an independent business owner, you would likely choose to make updates and improvements to your business over time. As a franchisee, when and how to “upgrade” is not up to you. If your franchisor updates its Operations Manual or system standards, you will be required to comply promptly at your own expense.
7. Transfer and Renewal Fees
When the initial term of your franchise agreement expires, you will have to pay a renewal fee as one of the conditions of renewal. If you want to sell your franchise, not only will you need your franchisor’s approval, but you will need to pay a transfer fee as well.
Request a Franchise Business Review from the Goldstein Law Firm
If you are thinking about buying a franchise and have questions about the costs or legal risks involved, we encourage you to contact us for a free initial consultation. To learn more about our firm’s flat-fee franchise business review services, please call 202-293-3947 or inquire online today.
