There are a lot of misconceptions about franchising, especially when it comes to money. People often say things like:
“Franchise companies make most of their profits from franchise fees.”
“If it wasn’t for those franchise fees, I’d probably consider buying a franchise business.”
In this article, I’ll explain what franchise fees are, why you pay them, and how franchisors make money.
What Are Franchise Fees?
Franchise fees are the cost of entry. Paying the upfront franchise fee gives you access to the franchisor’s proprietary business systems and more. Essentially, the franchise fee is a license to own and operate the franchise business. That’s why you have to pay it.
Franchise Fee Costs
Today, franchise fees typically range from $20,000 to $50,000, unless you’re looking at a Master Franchise, which involves purchasing a large geographical area and selling franchises in that area. The fee for a Master Franchise can be $100,000 or more.
It’s important not to confuse the franchise fee with the total upfront cost of the franchise business opportunity. The franchise you’re interested in doesn’t just cost $40,000; it might cost $175,000 when you include everything you need to open for business. Always consider the total upfront investment when looking to buy a franchise.
The “Other” Franchise Fees
There are additional fees associated with owning and operating a franchise business, such as marketing fees and royalties.
When you own a franchise, you benefit from the brand’s advertising. Franchisors spend a lot of money each year to promote their brand, and as a franchisee, you’ll contribute through a monthly marketing fee, usually based on your monthly revenue. For example, if your average monthly revenue is $25,000 and the franchisor charges a 2% marketing fee, you’ll pay $500 per month, or $6,000 annually. This is only a lot of money if the franchisor’s marketing isn’t effective. To find out if the marketing fees are worth it, ask other franchisees about their experiences.
Royalties
Another fee you’ll pay as a franchisee is a royalty, usually collected monthly and based on a percentage of your revenue. These percentages are higher than marketing fees, ranging from 4% to 12% or more, depending on the type of franchise business.
For example, a food franchise, which is a high-volume business, might generate over $1 million in annual revenue. Because of the high volume, the royalty percentage is usually lower. If you own a food franchise making $1.5 million annually and your franchisor charges a 5% royalty, you’d pay $75,000 in royalties each year.
In contrast, a business consulting franchise might have a 10% royalty rate, which sounds high, but the revenue is likely lower, around $300,000 annually. Franchisors don’t need to invest as much in a consulting franchise as they do in a food franchise.
Monthly royalties are where franchisors make their profits, not from the one-time upfront franchise fee.
As you can see, franchise fees are a necessary part of franchising. Both franchisors and franchisees benefit from franchise fees, marketing fees, and royalties if the franchisor provides a good business system and the franchisee follows it.
