When researching franchise investments, it’s important to understand the various costs and ongoing fees associated with ownership. Franchises charge one-time and recurring fees to franchisees in order to offset their training, support, and branding efforts. Here is an overview of the typical franchise fees and costs to be aware of.
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Initial Franchise Fee
This one-time fee is paid upfront to purchase the rights to the franchisor’s brand, systems, and support structure. It typically ranges from $30,000 to $50,000+. This upfront franchise fee covers:
- Initial training program for franchisee and staff
- Site selection assistance
- Grand opening support
- Startup materials and templates to launch franchise
- Early operational guidance and direction
- Broader administration costs to set up franchisee
This fee gives new franchisees access to the franchisor’s knowledge and tools required to operate under their flag. It must be paid before opening.
Ongoing Royalty Fee
The royalty fee is an ongoing percentage of gross sales paid by franchisees monthly or quarterly. It averages 3-8% of total gross sales. This allows the franchisor to collect ongoing revenue in exchange for:
- Continued use of brand name, trademarks, and products
- Ongoing support infrastructure access
- Field support for growth and optimization
- New product development
- Operational enhancements
- Marketing materials and branded collateral
- Research and development
The royalty fee varies by industry and franchisor. It provides continued access to central systems as a franchisee.
Marketing Fee
Franchisees also typically pay a monthly marketing fee to contribute to national level branding and marketing efforts. This averages around 2-4% of gross sales. The collected funds pay for:
- National advertising campaigns (TV, digital, print)
- Media placement
- Creative development
- Brand assets and style guides
- Public relations
- Consumer insights research
- Agency fees
Not all franchisors charge a marketing fee, but most pool this revenue to fund large-scale marketing efforts.
Renewal Fee
This fee applies when it comes time to renew the multi-year franchise agreement, often every 5-10 years. Renewal fees help cover the franchisor’s costs of processing renewal paperwork and updating training. This fee is typically 50% of the initial franchise fee (e.g. $25k if initial fee was $50k). Franchisors may also base it on a percentage of gross sales. This renewal allows the agreement to continue for another set term.
Build Out and Construction
One of the largest franchise costs is developing or leasing the physical store or restaurant location. This includes:
- Purchasing the property or securing a lease
- Constructing, remodeling, and upgrading the facility based on franchisor requirements
- All required permits, licenses, architectural fees, and general contractor fees
For retail, restaurant, and hospitality franchises especially, real estate and construction costs are often in the hundreds of thousands to millions.
Equipment Purchases
Franchise locations require specific furniture, fixtures, machinery, tools, computer systems, and equipment based on the type of business. This investment includes:
- Cooking equipment like ovens and grills for restaurants
- Shelving, cash registers, and displays for retail
- Gym equipment and machines for fitness centers
- Inventory and tooling for automotive franchises
- Technology like routers, computers, and POS systems
Equipment investments range widely based on equipment needs but often total $50,000 to $500,000.
Working Capital
Additional working capital is set aside to cover operating expenses during the launch and stabilization period before steady revenues kick in. This includes funding for:
- Payroll, taxes, and employee benefits
- Mortgage or lease payments
- Franchise royalties and fees
- Initial inventory and food costs
- Utilities, maintenance, insurance, supplies
- Contingency fund in case of delays or costs overruns
Some franchisors estimate needing 3-6+ months of operating capital before sales stabilize and the unit breaks even. Undercapitalization is a key reason new franchises fail.
Additional Costs
Other costs may include:
- Initial inventory to open, ranging $25k – $250k+
- Local pre-opening marketing and events
- Franchise attorney fees
- Required training and travel for franchisee
- Vendor deposits
- Licenses, bonds, permits
- Signage
- Point of sale systems and software
- Recruiting and hiring initial employees
As shown, franchise costs extend far beyond just the initial franchise fee. Understand all required investments when estimating startup needs.
FAQ About Franchise Costs
Here are some common questions about franchise fees and costs:
Can I negotiate the franchise fee or royalties?
Rarely. Franchise fees are usually fixed and non-negotiable for all franchisees, since they reflect the franchisor’s costs.
How much equity do I need?
Many franchisors require 20-40% equity. You need enough personal capital to cover the franchise fee, equipment, and about 6 months of operating funds.
Why are fees shown as a range?
Initial costs vary based on the particular site selected, local regulations, any custom build outs, and more.
When are fees paid?
The initial franchise fee is always paid upfront at contract signing. Ongoing royalties and marketing fees are paid monthly or quarterly.
Do all franchises charge royalties?
Nearly every franchise model charges ongoing royalties. Rare exceptions include Re-Bath, which collects fees upfront. But most collect monthly.
What does working capital cover?
Working capital ensures reserves to operate for months before sales stabilize, covering payroll, lease, inventory, utilities, supplies, debt and other expenses.
Understand All Costs Before Investing
Franchising involves major capital investments beyond just the franchise fee. Carefully study expected costs, talk to existing franchisees, and plan accordingly. Adequate funding ensures your franchise location starts off positioned for success.
