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What is a Franchise Fee?

By Felicia Dye
Updated May 17, 2024
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A franchisor is a person or company that sells use of its business to other people. A franchisee is a person who pays to use the business of another. This type of arrangement generally involves a long list of costs. One of them is a franchise fee, which is an initial sum of money that usually needs to be paid to establish this type of deal.

Many people make the mistake of confusing the franchise fee with royalties. These two costs are completely different. Royalties are monies paid after the business begins operating, and these are usually based either on sales or they may be charged at a flat recurring rate. Without paying a franchise fee, however, the business generally cannot commence.

A franchise fee is an upfront cost. It usually must be paid in full before a business can begin operating under the franchisor’s name or with the franchisor’s assistance. This fee can be considered a key that unlocks the potential to succeed but it does not offer the franchisee guarantees. Once it is paid, both parties are generally bound by certain obligations to the other. The franchise fee does not, however, entitle a franchisee to everything he will need and it will not entitle him to do whatever he likes.

In most instances this cost will ensure that the franchisee gets two things: the right to operate and advertise under a certain name and the use of the parent company’s system. He will have to purchase inventory, machinery, and pay salaries separately.

In some cases, the franchisee may be entitled to some additional items, such as training or business advisory services. It should not be assumed, however, that these things will be included in the franchise fee. Although a person buys his rights to run his business and becomes an independent operator, he is still bound by certain rules and agreements. For a franchise to be efficient, certain standards must be consistent and the payment of fees does not change this.

The franchise fee is usually not determined by location or by industry. Instead, this start-up cost will usually vary depending on the stature of the business. Two businesses in the same industry and operating in the same city could cost drastically different amounts to start. As is the case with most things, franchises base their fees on their value. A business that plans to become part of one of the most popular franchises can, therefore, expect to pay more.

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Discussion Comments

By cupcake15 — On Apr 08, 2011

@Subway11 - Wow that is a lot. I think that the best franchise is a homebased franchise because you do not have to worry about having such a high initial investment that it makes the opportunity seem a little less risky.

Many homebased business franchises could be run for under $10,000 which really allows you a lot of room to grow and earn a profit. When a business requires $200,000 or $300,000 the stakes are a lot higher and you really have to understand the industry and the specific business opportunity before you invest.

I was reading that you can start a homebased travel agency for about $2500. This could be a great opportunity for someone that is having a hard time finding a job and needs to earn some money because they company that offers these franchises offers a training program that will allow you to open a business in this industry without prior experience.

By subway11 — On Apr 07, 2011

@BrickBack - I agree that using a business broker is a great step in finding the right business but you should also research franchise sales in many business newspapers to see what a typical franchise in your area of interest costs and how much money you need for the business.

There is a publication that lists the top 500 franchises and offers information regarding the initial franchise fee, the total investment needed and the training associated with the business. It also tells you the ongoing franchise royalty fees.

For example, I looked up a supplemental education company that my children participate in and they charge $110 per subject per month, but the franchise royalty fee is $35-$38 per student which is pretty steep when you take into consideration what the business charges the customer.

By BrickBack — On Apr 06, 2011

@Sneakers41 - I agree and I think that you should get as much information on the various franchises available in order to find out which one is best for you.

In most markets they offer franchise shows where you can learn a little about each of the opportunities and I would also go to a business broker to help narrow down my choices.

A business broker acts sort of like a real estate agent but instead of selling homes, he is selling businesses. They can give you questionnaires to help you narrow down what type of business you are looking for based on the income potential that you are seeking.

They will not charge you anything because they earn commission from the seller of the business and not the buyer. So you really have nothing to lose and they could be a great source of information for you and they might even have a great business for sale that you never even considered. Some of these businesses might offer seller financing so you might be able to purchase a business with less money out of pocket.

By sneakers41 — On Apr 03, 2011

I was reading that the average franchise fee was up to $30,000. The franchises will also provide the amount of startup capital that is required along with a projection of when you can anticipate you will break even.

Some franchise companies will even finance the initial franchise fee through a third party while other franchises will require you to have the money upfront.

The more money you have set as side the best position you will be in when applying for a franchise because many of these companies know that the biggest reasons why people fail is because they undercapitalized and do not have enough money to fully support their business.

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