Typical franchise fees run between $25,000 and $50,000 on average and vary from business to business. How much would you deem reasonable? It depends on your situation. For instance, an experienced business owner might consider a particular franchise fee unreasonable, while an inexperienced investor may not.
Besides, other costs come into play and may need consideration before signing on the dotted line and starting operations. Case in point, most franchisors include an ongoing marketing fee in their agreements. The implication is that franchisees have to continually chip in by footing part of the franchise’s overall marketing bill. That’s before considering the cost of a unit’s local marketing initiatives. And while we’re on the subject, you can click here for affordable local franchise marketing.
So, what would a reasonable franchise fee account for? Is there room for negotiation? Are there factors a franchisor might consider before settling on the franchise fee? Let’s attempt to answer these questions so you can find out what a fair price might entail.
What is a Franchise Fee?
A franchise fee is the upfront payment you make to a franchise company so they can grant you access to their proprietary systems. It also allows you to use the franchisor’s methods of operation, brand, or marketing techniques. Simply put, it’s the cost of admission or entry to a franchise network, providing you with a license to operate a similar business for a given period.
The initial fee to operate a franchise unit tends to be lower than for a master franchisee, with average fees for the latter being $100,000 or more. A master franchise involves buying the right to sell franchises in a large area over a defined period.
A franchise fee isn’t the cost of starting a franchise business. Find out the total upfront investment you need to make when evaluating potential franchising opportunities, as this tends to be much higher when you include the cost of entry.
Is the Fee Negotiable?
Yes, and no. I know the answer must be confusing. Let me clarify.
Generally, franchise fees aren’t negotiable. A franchisor sets the fee, and candidates who qualify pay it in most cases. Plus, it doesn’t seem logical to charge different fees to prospective franchisees. But wait, there’s more to it.
Let’s suppose a franchisor is at the formative stage of growing their franchise and is keen to attract franchisees. Wouldn’t they be open to negotiation? You bet! With the help of a competent lawyer, you can negotiate the upfront fee in light of the firm’s intellectual portfolio, proprietary information, and the support you’re likely to get in return.
A franchisor may also offer an incentive to attract potential candidates who may be turned away by a high cost of entry. They may also offer discounts to veterans or minorities to entice franchisees.
Essentially, the computation of franchise fees isn’t always straightforward. But that doesn’t imply that franchisors pluck figures from the air. Here’s an overview of a combination of factors a franchisor would consider while setting a franchise fee.
Do you plan to open a franchise in a large busy city or a smaller town? Running a business in an expansive city means higher overhead costs, and so would the franchise fee. A franchisor has to consider the costs of setting up a franchise in their upfront fee. These may include:
- Costs associated with initial training
- Advertising expenses
- Marketing material and on-site support
- Hiring costs
- Cost of sales
- Legal fees
Selecting an ideal spot to set up a franchise requires market research. As such, franchisors have to consider the costs associated with looking for suitable sites.
Plus, what’s the extent of the territory they’ll have to protect from the competition? How much does the franchise spend while selecting suitable franchisees? All these elements account for the fee you’re likely to pay.
Duration of the Contract
While it’s not a rule of thumb, a long-term contract may require a higher upfront payment. The idea is that you’re likely to benefit from the firm’s systems and brand name for a longer duration, providing you more stability. But, a contract that locks you in for a long time may be counterproductive if you opt to take a different business direction before termination of your agreement.
A well-grounded franchise is likely to charge a higher upfront fee than one that’s starting to roll out franchises. In the former case, new entrants would be paying for the higher value of the established franchise, its support network, branding, trademarks, and proven system.
Overall, setting imposing upfront fees can quickly turn away potential franchisees. Franchisors need to weigh the market potential of their businesses while determining their prices. On the flip side, talking to existing franchisees about real-time costs can help you as a prospective franchisee to compare estimates. In so doing, you can establish if the fee is reasonable or not. And once you get your feet wet by starting a franchise, consider hiring a local franchise marketer to take your business to the next level.