Franchise fees what is

Are you undermining your system by foregoing this fee and not investing in technology? Previous Blogs. Oct 22, Oct 14, Oct 07, Sep 25, Aug 18, Aug 10, Jul 21, Jul 02, May 04, Apr 07, Will you be ready for the recovery? Mar 25, May 23, Mar 14, Feb 07, Sep 27, Sep 21, Sep 18, Aug 21, FranConnect Voted No. Jul 11, Mar 06, Feb 11, Feb 09, Oct 02, Aug 16, Jul 26, Jul 19, Jul 13, Jun 28, Jun 21, Engage candidates during every stage of the franchise sales cycle.

Jun 14, May 26, Franchise economy remains positive during political uncertainty. May 24, Three franchise field operations models for franchisee support. May 03, Apr 28, The fee is merely a payment for joining the franchise system under the terms of the franchise agreement. Essentially, the franchisee must pay for the rights to all of the franchisor's assets that will help them succeed as a business.

These assets hold a lot of value, so upfront fees can be expensive. Because the franchisee will continually benefit from these assets, there will usually be ongoing fees as well. These can be royalty payments or marketing fees, and they can be calculated in many ways. This payment, along with its frequency, is disclosed in the franchise disclosure document.

The amount a franchisor sets as their franchise fee varies from industry to industry and even within franchisors in the same industry. For the most part, a franchisor will set the franchise fee at a level that will enable them to market their opportunity to prospective franchisees and pay commissions to franchise salespeople , while also giving them the resources necessary to provide initial support to franchisees.

These costs generally include initial training, visits to approve the site, and monitor the franchisee's site development, initial advertising, and opening support, among other costs. In setting their fees, franchisors are also cognizant of the initial fees charged by their direct competitors and others targeting the same prospective franchisees. For new franchisors who have not yet developed a robust pipeline of prospective franchisees, the initial franchise fee may not be a significant profit center.

As their franchise system becomes better known and they have a more robust stream of potential franchisees, franchisors can begin to leverage their costs over a growing number of potential franchise candidates. From a financial reporting basis, until the franchisor has substantially provided all of its contractually obligated initial support generally indicated when the franchise is open for business , they cannot recognize the franchise fee as income.

For most franchisors the initial franchise fee is not negotiable but, like any contract, the amount of the franchise fee is whatever the two parties agree it to be. Franchising is all about consistent and sustainable replication, and if one franchisee has paid a lower franchise fee than others, it can cause problems. A good rule to follow in setting fees is to ensure that franchisees in similar circumstances should be treated in the same way.

However, there are a few situations where franchisors will often alter the amount of their initial franchise fee:. When a franchisee agrees to open multiple locations throughout a defined period, this is traditionally called a multi-unit development or master franchise agreement.

In this type of agreement, it is not uncommon for franchisors to reduce the franchise fee for locations the franchisee is scheduled to open later on in the development schedule. This operates as an incentive for the franchisee to open up more than one unit. It is also becoming more common for multi-unit franchisees that sign a development agreement also to pay a lower continuing royalty fee. While technically not an initial franchise fee, a transfer fee is paid when a franchisee sells their business and transfers their rights as a franchise to another party.

The initial fee they pay when entering into the successor agreement is generally referred to as a renewal or successor fee. Similar to the transfer fee, the renewal fee usually is a lower amount than charged to new franchisees. However, it should be noted that at present only six of 10 provinces have franchise-specific legislation.

But, the Canadian Franchise Association does its best to foster transparency between franchisors and prospective franchisees by requiring its members to produce a disclosure document regardless of province. However, the franchise fee is only the start of the initial investments you will need to make. There are plenty of other expenses that a franchisor will walk you through, but the initial fee to them is only that—an up-front fee that lets you operate the franchise.

In essence, the initial fee buys the license you need to operate a franchise. For example, you must run the franchise operation in the manner dictated by the franchisor. Many items in a franchise contract are negotiable, but franchise fees usually are not one of them, especially for first-time franchisees.

The usual contract is a template that is standard and non-negotiable. As you research franchise possibilities for your entrepreneurial adventure, there will be many levels of franchise fees within your overall budget. With federal oversight and required disclosures, your franchise fee will open the door to a recognized and proven brand with the support and expertise that you can use as a roadmap to franchise success.