Franchisers charge a substantive fee to franchise owners to cover the initial startup costs and to maintain grown within the company. Depending on the company and the type of franchise you own, the franchise fees can vary from business to business. While a franchise payment is important in allowing the company to grow and prosper, the main source of income for the company should always be based on the amount of royalties it makes from the sale of its products or services.
A franchise fee that is set too high may make potential franchisees think twice about becoming professionally involved with the company. It is important to determine an appropriate franchise expense and using your franchise consultant and legal team to negotiate a fee that works for both parties. Take into account the specific service or product the franchise will provide, along with the potential return of investment and profitability of the business.
Sometimes, in a market that doesn’t have a history of a certain type of product or service, these fees will have to be estimated because there is no statistical data on the ROI of the business. Your financial performance and the financial performance of other franchisees like you determine the fee that will be assessed in the future to other new franchise owners. If you’re entering a business environment with a product in a somewhat untested market, you may have a lower franchise fee. However, if you’re opening a franchise in an environment that has had proven success and profitability, the franchise fee will be higher.
You also must consider the startup costs and expenses the franchisor has to invest. If you are opening a franchise in an already established industry, for example – a fast food business, the difference in franchise fees may be more obvious. In this type of industry, the franchisor is responsible for the costs and expenses associated with the marketing and advertising. They will include these factors in the franchise fee, as well as the costs for training materials and other startup expenses such as the assistance provided during the grand opening phase.
Some franchise companies look to make a profit by charging a franchise cost that is too high. Others look to charge a fee that will even out, while some even charge a franchise fee that is low and will cost them money initially. The hope is that the royalties and profits made will far surpass any losses they endure from a smaller franchise fee. Most franchisers will try to at least make a 25% profit on the fee. Of course, they are providing the marketing materials and advertising development. If all goes successfully, you’ll recoup the money spent on the franchise fee and begin to operate a profitable business.