What Do Franchise Fees Cover?
Understanding Franchising Fees
Upon acceptance to become a franchise owner, you will have to pay a one-time fee to acquire the business system and other resources. This franchise fee may influence your decision to buy one brand over another. However, as you review different options, the franchise cost at face value should not be a determining factor. In addition to the number, you need to consider what the fee covers.
Basic Inclusions of a Franchise Fee
Regardless of the business you purchase, the fee to own a franchise generally includes the brands:
- Name and logo
- Products and services
- Business model and trade secrets
- Training, operating and marketing resources
You will also receive assistance in selecting the location. You can ask the company and its current franchisees for more information on what you will get. Seek opportunities that come with comprehensive training programs and ongoing support. By federal law, all these details must be in the franchise agreement.
How To Determine Franchise Value
Once you know what it would entail, evaluate if the franchise is worth the cost. Consider the following factors as you determine value:
- Royalty fees
In addition to the up-front fee, you will have to pay continual royalties based on a fixed or fluctuating percentage or on a fixed amount. Find out what the rate will be.
- Additional expenses
Review what other expenses you will be responsible for, such as the lease, equipment, security deposits, and opening inventory. While one franchise may have a lower fee, additional costs may cause it to be more expensive in the long run.
- Brand reputation
Some franchises may be pricey, but if the brand fits a wide audience, has a strong reputation, and fills a needed niche in your area, then it may be worth it. Any profits you make will offset your initial investment.
- Business history
Business News Daily recommends looking at the company’s business history by reading the franchise disclosure document . Warning signs to watch for are unstable financial conditions, bankruptcies, a high franchisee turnover rate, and lawsuits. You can also check with the Better Business Bureau.
- Average earnings
The document should also share the average earnings of other franchise owners. However, the Federal Trade Commission warns that figures may be misleading depending on what data the company obtained and how.
- End-of-contract fees
Transferring or renewing your contract when it ends will also require a payment, though it will be lower than the original franchise cost.
The best way to get information on these factors is to talk to multiple current and past franchisees. There will be no perfect franchise that no one has had issues with, so look for feedback that is positive overall and consistent across the board.
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