When evaluating franchises to buy, in a perfect world, a prospective franchisee shouldn’t have to worry about “hidden” franchise fees and costs. Better franchise companies will be transparent, even more so than what they are required to disclose in their franchise disclosure document (FDD).
It is critical for the new franchisee to ask plenty of questions and do homework on the company they are buying into. But generally speaking, here are some of the basic fees most franchises will charge, as well as some related costs a franchisee can expect to encounter.
The initial fee, also known as the “franchise fee,” is the payment a franchisee makes to join the franchise system. This is usually a one-time flat fee.
This fee must be above at least $500 and typically ranges from $10,000 to $50,000. The franchise fee doesn’t cover ongoing support; it is the initial investment required to be a part of the franchise system.
The amount of this initial investment varies by industry and from franchisor to franchisor. The franchise company normally will set a fee that makes the opportunity marketable to potential franchisees while also enabling the franchisor to pay commissions to its franchise salespeople, with the rest to help give initial support to the franchisee.
Traditionally, this fee may also be used by the franchisor to help the owner with site development, training, and initial promotion.
Other Early Costs
In preparing to join the franchise and becoming a franchisee, you likely will incur other front-end costs, besides your franchise fee, including legal and accounting fees for review of your franchise agreement and crunching the numbers.
Depending on the type of franchise you open, you may have to purchase real estate and pay to build or renovate a building. This may not be the case if you buy a home-based franchise, versus a brick and mortar storefront.
Think about the day to day operations of a business. You may need to budget expenses for a grand opening, local promotions and advertising, supplies, rent (if not buying), maintenance, uniforms, salaries, and more. This is where an entrepreneur considering a franchise should keep a keen eye out for possible “hidden” costs. This is a key factor that you should be asking questions about what the franchisee and franchisor’s respective responsibilities are in paying for these resources.
In fact, a given franchise brand often will require the franchisee to purchase certain goods and services from them.
Further, many franchises require franchisees to have enough liquid funding (working capital) to cover operating costs as the business gets its legs. Again, more questions that should be on your mind during this process.
A royalty fee is a regular fee, paid weekly or monthly based on a percentage of gross sales, that the franchisee pays to the franchisor, to be used for ongoing support of current franchisees and in helping grow the system.
The percentage used to determine the fee may range from 4 percent to 12 percent, depending on the franchise.
Some franchise systems charge a fixed or minimum fee, rather than basing the royalty fee on a percentage.
Prospective franchisees can find the amount or percentage used to determine this payment, as well as the frequency it must be paid, in the franchisor’s franchise disclosure document (FDD).
Advertising or Marketing Fee
One of the advantages of being part of a franchise system is brand awareness, and each franchisee must pitch in to enable the franchisor to develop and carry out national advertising and promotions that benefit owners.
The franchisor may create an advertising fund to contribute to its programs for creating and placing ads. These marketing/advertising fees typically are a percentage of monthly revenue, often between 1 percent and 4 percent.
The Bottom Line
These are just some of the traditional types of franchise fees and costs you can expect, but it is incumbent upon each entrepreneur to ask plenty of franchise questions in vetting franchisors.
Remember, this is the time to completely understand the costs associated with this business venture.
Founded in 2008 in St. Louis, Missouri, MassageLuXe is a fast-growing franchise-based spa company with a mission of delivering the highest quality massage while providing a comfortable, relaxing and luxurious environment to clients. To further this mission, MassageLuXe also grants clients access to Repechage facials and waxing services.
Massage is a service that improves health, promotes relaxation and overall well-being for the consumer, and has been practiced throughout the world for thousands of years. MassageLuXe currently has 68 locations across 16 states and is planning to expand to 250 locations in the next five years.
For more information about MassageLuXe, please go to https://massageluxe.com/.
For franchising information about MassageLuXe, please go to https://franchise.massageluxe.com/.