What Is a Franchise Fee?

Franchising fees are payments franchisees make to their franchisor for the right to use their brand, products, and intellectual property. Depending on the terms of the franchise agreement, payments are either made upfront or periodically.

Franchisees benefit from the company's brand recognition and systems rather than starting from scratch. But these benefits come with a cost. Find out what franchise fees are for and how they work.

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What Do Franchise Fees Mean?

There may be variations in what constitutes a franchise at the state level, although, according to the FTC's definition of franchising, a business relationship qualifies as a franchise if three factors exist:

1. Franchisors license their trademarks, service marks, logos, and other proprietary marks to franchisees.

2. Franchisors exert "significant control" or "significant assistance" over franchisees' businesses.

3. It is mandatory to make an initial investment of $500 to the franchisor immediately before or within six months of opening the business.

According to the third element, a franchise agreement must include a fee to be considered official.

How Franchise Fees Work

When a franchise signs their franchise agreement and becomes a franchisee, they usually pay an initial fee to the franchisor. The franchise disclosure document will disclose how much the franchise fee will be (per the FTC Rule) and is typically in the range of $20,000 to $50,000.

People often think that paying a franchise fee entails receiving initial services and support from the franchisor, but this is rarely true. The franchise agreement specifies that the charge is a one-time payment for membership in the franchise system. To put it simply, the franchisee must pay for the right to use all the franchisor's assets to succeed as a business. Due to the high value of these assets, upfront fees can be costly.

The franchisee will ultimately benefit from these assets, so ongoing fees are occasionally usually involved. It is possible to determine royalties and marketing fees in many ways, and they can take place in many different ways. Franchise fees are typically a percentage of the gross or net revenue of the franchisee. The franchise disclosure document discloses the amount and frequency of the payment.

What Determines Franchise Fee Amounts?

In different industries, and even among franchises within the same sector, franchisors set their franchise fees differently.

Most franchisors set their franchise fees at a level that will enable them to market their opportunity to prospective franchisees, pay commissions to franchise salespeople, and provide them with the resources necessary to offer franchisees initial support.

Among other things, these costs cover initial training, approval of the site, monitoring the franchisee's site development, and opening support.