When buying a franchise, there will be a number of ongoing expenses and fees to be evaluated. There’s the initial franchise fee. Then there’s the royalty fee, software fee, late fee, renewal fee, marketing fee, advertising fee, transfer fee… and the list of fees involved with buying into a franchise goes on and on. Negotiation is an art, and done properly, it can save money both up front and on the back end of buying into a franchise. Here, we break down the two biggest franchise fees – the initial franchise fee and the royalty fee. Royalty fees represent a monthly or weekly fee that you will be required – on an ongoing basis – to pay to the franchisor. Typically royalty fees are not negotiable and are fixed by the terms of your franchise agreement.
The Initial Franchise Fee
The initial franchise fee, sometimes simply referred to as “the franchise fee,” is what you usually find on websites like Entrepreneur, Business Insider, Forbes, and Franchise Times. If you read any list of “the most affordable franchises,” you will see them stacked with flat fees that you assume you can pay to buy into that particular franchise. The initial franchise fee is just the tip of the iceberg. It’s the fee you pay the franchisor for their great idea. You will be paying the franchisor for the use of their trademarks, methods of operation, marketing techniques, and other proprietary information.
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The initial franchise fee isn’t typically negotiable. It would not look good for a franchisor to offer different initial franchise fees to different franchisees. On the other hand, if you are interested in buying into a new(er) franchise, there may be some wiggle room as the franchisor is most likely seeking to grow in its early stages. Consider what you are getting in return for the initial franchise fee. Does the franchisor have an intellectual property portfolio of trademarks, patents or copyrights? Does the franchisor have an operations manual that contains all the proprietary information you will need to be a successful franchisee?
Royalty Fees
Royalty fees are typically a percentage of gross revenue that you will have to pay the franchisor each month. It is important to distinguish this from the initial franchise fee. Royalties do not compensate the franchisor for their great idea – you already paid them for that with the initial franchise fee. Royalties compensate the franchisor for ongoing support and development of the franchise system. We frequently encourage prospective franchisees to challenge franchisors by asking what ongoing support and development will be provided in exchange for monthly royalties.
Think of it this way – if you are going to give the franchisor anywhere from 5-10% of your monthly gross revenue for the next 10-20+ years, who says they won’t just kick back and enjoy a chunk of your profits while retired on some beach somewhere? The best franchisors never lose the entrepreneurial spirit that got them into franchising in the first place. When considering your royalty fees, find out what the franchisor’s plans for the overall franchise are.
Royalty fees are sometimes negotiable. We have had success in negotiating them to both lower rates and incremental rates, the latter of which can give franchisees more room to breathe when first opening their franchise.
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