INSIGHTS/

The Costs and Value of Franchise Fees

If your franchisor is holding up their end of the bargain, you should be getting your money’s worth and then some

April 24, 2023

Franchise skeptics often believe franchise fees are “too high.” They imagine they can make the same amount of money without the help of an established brand and are better off flying solo. In truth, they’re missing out on a substantial investment opportunity.

The Price of Doing Business

The term “franchise fees” usually refers to the fees charged at the beginning of the franchisor-franchisee relationship. They’re a one-time upfront cost, typically starting at $20,000, and can increase substantially. Franchise fees permit you to use the company’s systems, processes, and marketing, alongside other perks of owning a franchise. They pay for the franchisor’s upfront costs of onboarding your business and are only a fraction of total startup costs.

But experienced franchise owners know that “franchise fees” are not the only fee franchisors charge. Marketing fees are recurring fees calculated as a percentage of monthly revenue. These fees usually go directly to the franchisor, but sometimes, they’re collected by a regional cooperative. The marketing fee rate is usually 1%–5%. That might sound like a lot to the uninitiated, but if your franchisor is holding up their end of the bargain, you should be getting your money’s worth and then some. After all, widespread brand recognition is one of the top reasons people enter franchising.

Some franchisors also charge operational fees to pay for technology or support. They should provide a tangible value to your business, not be a source of revenue for the franchisor. Franchisors don’t make money based on any of the above fees. Their profit comes from royalties. Royalties are the largest overhead cost franchisors directly charge to the franchise.

Franchisors usually calculate royalties as a percentage of revenue, and the amounts can range significantly. High-volume businesses with higher revenues (like quick-serve restaurants) usually have a lower royalty rate, while lower-volume franchises typically pay a higher percentage to their franchisor.

Those who feel royalties and other franchise fees are “giving money away” fail to understand the basics of the business model. Franchisors only profit if their franchisees make money, incentivizing them to keep fees as low as possible. Further, entrepreneurs partner with franchises because they get more out of the agreement than they give. When someone’s franchise fees are “too high,” it’s usually because they picked a subpar franchise or are in the wrong line of business.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.