The Franchise Fee Info
Amongst all the jargon summarising the various facets of the franchising industry, one term of perennial importance keeps popping up: 'the franchise fee'. It should come as no surprise that it’s on the tip of every tongue in the trade, given that it can make or break a franchisee's ambitions. But what exactly is a franchise fee? What does it cover? Can you acquire any support in paying for it? And do different franchises handle their fees in different ways?
In The Franchisee Fee Info pages, Franchise Direct will take you on a comprehensive tour covering every element of the franchising fee, how it affects you and how all is not lost if your budget doesn’t stretch to cover the required amount.
What is a franchise fee?
In its simplest form, the franchise fee is the price you pay for joining a particular franchise. By definition, franchises differ substantially from other business models by permitting their name, logo and products/services to be replicated and sold by others (franchisees) at a 'cost'. That cost is the franchise fee.
Matteo Frigeri, Business Director with Seeds Consulting, explains about the franchise fee, or minimum threshold for franchisee eligibility, as displayed in the In Brief section of the Franchise Direct profiles under the title 'Minimum Investment'. “It is the minimum amount of capital required to establish a franchise,” he says. “Franchisors use the term differently: in some cases they mean the total investment in the franchise, in others the portion of the total investment that the franchisee needs to cover with unencumbered funds. If the former, the franchisee's due diligence should determine exactly what investment items are included in the figure and whether such minimum scenario is realistic. If the latter, it is paramount to estimate what the total investment in the franchise is and what % of it the franchisor requires a franchisee to provide from their own funds. VAT is always excluded from the minimum investment figure.”
What does the franchise fee cover?
Having parted with the requisite amount of cash, the franchisee is entitled to full use of the franchisor's:
- Supply chain (if applicable)
- Website (if applicable)
- Support and training.
In short, the fee covers everything that the franchisee needs to get their franchise up and running. While a conventional sole trader forks out for a business with dubious future success, a franchise fee guarantees you access to a resilient business with profitability that has already been proven elsewhere and with an owner who already has much experience in negotiating the various challenges the fledgling franchisee is likely to face. This is one of the main strengths that make franchising such an attractive option to those who are seeking to launch their own business and may otherwise be put off by the inherent risk of the newness of such a venture.
What is the difference between a franchise fee and a royalty fee?
A point that often initiates confusion in prospective franchisees is the discrepancy between a franchise fee and a royalty fee. The franchise fee is a one-off fee covering all of the terms stipulated above and financing all of the ingredients needed to launch and sustain a franchise outlet. The royalty fee, on the other hand, is the ongoing contribution you pay to the franchisor as a part of the franchise agreement. Deducted from your gross profit, it is normally payable on a monthly (or sometimes weekly) basis. Royalty fees can fluctuate from franchise to franchise, with some being fixed amounts and others varying depending upon trade for the payable period. All of this is contingent upon your franchise agreement. For more about the franchise agreement please consult this article.
Can I avail of any support for paying my franchise fee?
Some franchises do offer financial support to franchisees either directly or through a third party. If so, this assistance will be evident in the In Brief section of the franchise's Franchise Direct profile, as shown in the picture to the right.