Any discussion about joining a franchise will inevitably bring up the defining characteristic about this business model: franchise fees. No matter what you think about the franchise system, franchise fees serve as the basis of the franchisor-franchisee relationship, and for good reason.
This setup might be alarming to prospective franchisees already leery of the many pitfalls of becoming an entrepreneur. After all, independent business owners don’t have to pay franchise fees, and there are already numerous fees involved with running your own business.
On the other hand, a franchise business owner gains many benefits by joining a franchise brand. For this reason, franchise fees can be viewed as a tradeoff for the gained benefits, one in which the value outweighs the costs.
To better understand questions like “What is a franchise fee?”, let’s take a deeper dive into the kinds of fees a new franchise owner can expect to pay by joining a franchise.
Franchise Fees
A franchise fee is a payment that gives a franchisee the ability to sell a brand’s proprietary products and services, and the right to use the brand’s intellectual property. As well, it provides them with access to the brand’s resources and operating procedures. By paying these fees, a franchise owner becomes a part of an exclusive organization that offers exclusive benefits.
The initial franchise fee can vary greatly, costing the typical franchise owner anywhere between $5,000 to $75,000. In return for this lump sum, a new franchise owner can expect a level of initial training and support that is directly proportional to the initial franchise fee. This fee will also be used for franchisee recruitment, territory analysis, site identification, and the launch of your new franchise location.
As the use of these funds primarily go back to help the new franchise owner, another way to look at it is to say initial franchise fees are the payments a franchise owner makes towards their own self-investment. In this situation, the new franchise owner can really benefit from a franchisor that has a lot of experience launching franchise locations.
Ongoing Royalty Fees
Ongoing royalty fees are the payments that a franchisee will continually pay to a franchisor. Usually provided on a monthly basis, ongoing royalty fees can range anywhere between 0-20% of a franchisee’s gross sales.
As with initial franchise fees, the wide discrepancy is matched by the level of support provided by the franchisor, one in which high royalty fees are commonly associated with a high level of franchise support and services.
These exclusive perks can be extremely beneficial to a new franchise owner, and can include:
- Ongoing training programs
- Business consulting and optimization
- Research and development
- Reviews for store operations and brand consistency
- Computerization
Agreeing to pay ongoing royalty fees to the franchisor in exchange for ongoing benefits are all detailed in the franchise agreement, an important contract that details how a franchisee and franchisor are expected to fulfill their obligations.
And with so much support available in this kind of relationship, we see that franchise fees such as royalty fees serve a specific purpose in the franchise system. Their payment helps provide for services that benefit the franchisee, thereby leading to increased revenues and better opportunities for growth.
Advertising Fees
Advertising fees are funds collected from franchise owners and used for regional and/ or national advertising. Also known as “marketing fees,” this cost is determined as a percentage of the franchise owner’s gross sales, typically ranging from 1 to 4 percent. Conversely, other franchises may decide to set a flat fee, or in some cases no fee at all.
As with prior explanations, “fees” is a bit of a misnomer because the money paid is used to benefit the franchise owners themselves.
Advertising fees pool together a combined fund that is used for the purpose of spending it on impactful advertising decisions that can benefit and promote the brand as a whole. Some franchises appoint an advisory council to make decisions for the group as a whole, resulting in strategies such as large-budget television commercials.
Because advertising fees do not go straight to the franchisor, they are not considered royalties. What’s more, franchise owners that pay little to no advertising fees can expect to have a diminished advertising presence for their brand.
Final Thoughts
As we see, even though giving them three different names may make them seem like a lot, different franchising fees have different purposes that serve different ends, most of which are used to benefit franchise owners.
Starting a new business is never easy; a small business initial investment can take years to accumulate, making it difficult to pay more than what’s necessary. But, you don’t have to do things the hard way.
Because joining a franchise offers numerous benefits which are subsidized in part by the franchise owner themselves, franchise fees make for a smart strategy that pays off for everyone in the long run.
Are you looking for a franchise opportunity? St. Louis Bar & Grill is a long-standing franchise that has grown to over 70 locations across Canada, and we’re looking for new franchise owners to join us. Read how we’ve become such a popular brand to both our franchisees and customers.
Find out more franchising tips in our blog! Discover why franchise marketing is so important, and learn how to create a franchise plan!