Franchising is seen by many as the most effective way of starting your own business, but there are many hurdles to cover and research to be undertaken before any commitment should be made.
The franchisee needs to be aware of their financial status, limits and sources before resolving to take on a franchise. In particular, the details of the franchise fees need to be negotiated and examined before any deal between franchiser and franchisee is made.
These can consist of deposits, initial fees, ongoing fees, advertising fees and other costs the franchisee could be accountable for.
Deposits are often charged by a franchiser and can be either fully or partially non-refundable. The deposit often helps locate a suitable territory or property for the franchise, although the sum is most likely to be used in some capacity to help the franchisee get on their feet.
Types of Fees
- Initial fees can vary between companies, but generally consist of a fee covering training, recruiting and various other initial costs for starting up a business, such as specialist equipment, stationery and launch costs.
- Ongoing fees consist of a percentage of the sales from the franchisee, after VAT. Again, this system varies from company to company, although commonly it is directly related to the amount of involvement the franchiser has with the franchisee.
*Some companies will not charge any ongoing fees, relying instead on marked up prices for their goods. Potential franchisees therefore need to be exactly aware of what they are required to pay, how often it is needed, what the percentage of any sales is based on and if there are any hidden fees.
- An advertising fee is also used by franchisors to help cover the cost of any marketing or promotion work carried out as part of the company's services. These fees are generally percentage-based and range from around one to five percent of gross sales.
This fee covers national or major advertising campaigns and as such many firms will not ask for an advertising fee from many start-up franchises as there would be little benefit. However, any local advertising undertaken would have to be paid for by the franchisee.
Other issues of concern to potential franchisees include extending contracts, in which an additional transfer fee is often needed, special fees for improved training or equipment, and the fact that the larger the corporation behind the franchise and the greater its input into the local franchisee's work, the higher the fee will be.