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.