Quantcast

Nationwide Listings For Buying And Selling Commercial Real Estate And Businesses

"Buy or Sell Locally - Advertise Nationally"

Glance at the Fee Structure of a Franchise Business

In a franchise business model, the franchisee has to pay fees to the franchisor in order to own and run a franchise business. The franchise fees are divided into two parts: basic fees or front end fee which is one time and back end fees which are in continuous in nature. Both fee structure terms and conditions will vary from franchisor to franchisor, and even sometimes vary from geographical location to geographical location. Among the front end fees, the most common are application fee, transfer fee, training fee, business inventory fee, equipment fee, development fee, etc. Among the continuous or back end fees, the most common fees are royalties, advertisement, and upgrade fee, etc. All these fees are collected from the franchise to use the franchisor business model, brand name, assistance, etc. and these fees will be set by the franchisor.

Basic Fees

Application Fee

This is sometimes also called the initial franchise fee. The majority of the time this is a non-refundable fee. This fee varies from franchisor to franchisor, from location to location within the country, and also from country to country. This is absolutely decided by the franchisor. Small or new franchisors may have lesser fees whereas big franchisors have higher fees. Sometimes franchisors may waive the fee for the new locations or expansions. No matter how much it is, the franchisor is obligated to notify the franchisee about the basic or application fee along with disclosure at the initial inquiry about the franchise business. This will be applied to new and existing businesses.

Initial Development Fee

In a few situations the franchisor identifies the new locations to open new outlets. The franchise may take an initial deposit toward the development of a new location, such as for inventory, equipment, rent, development, licenses and permits, etc. Occasionally they may also charge opening fees.

Transfer Fee

Each franchise will charge the ownership transfer fee. This fee varies from franchisor to franchisor and within the same franchise also it varies. This is a kind of high amount and this is a one-time fee. Be careful; sometimes even if you transfer from your name to your son’s name, they will still charge at the time of signing. Please clarify with the franchisor about the transfer fee. This transfer fee also fluctuates based on the sales of volume of the location.

Initial Training Fee

In the majority of franchise businesses, the franchise has to complete the initial training period and the franchisor will charge a fee for the training. This training duration varies from franchisor to franchisor and all training will be done only in the franchisor’s set places. There is the additional cost of accommodation, transportation, and other expenses you may incur to complete the training.

Termination Fee/Liquidated Damages Fee

This is one time fee if the franchisee decides not to do run the franchising business with termination franchising business agreement before the end of the term the franchisor has to right to charge the fee of Early Termination or Liquidated damages fee. This is a one time and the amount fee will be varying from the franchisor to franchisor.

Ongoing Fees

Royalties

This is one of the ongoing fees that the franchisee has to pay to the franchisor and this will be based on the sales volume or gross revenue. On a few occasions there is a set royalty fee that has to be paid irrespective of gross revenue. Please read carefully when you are signing the franchise agreement regarding royalties. It is always a good idea to take an attorney or accountant to understand the royalty structure.

Advertisements Fee

Every franchisee has to pay a portion of gross revenue toward advertising. This is a standard fee collected from all outlets/locations. From the collected funds, some portion goes to general or national marketing to attract new investors and also to promote the business. The rest of the amount goes to local marketing, including discount offers, promotions, etc. to attract local customers.

Upgrade Fee

The franchisor adopts new products and technology to fulfill the customers’ needs and also to make the franchisor new and attractive. As the franchisee you will incur those expenses on and off. You may require a new building model, signage, interior decoration, new equipment, new software, new promotions, etc.

Update training

The franchisor will provide training for new technology, operation methods, and other new requirements. If this is on-site training, the trainer will come to your site and train you. However sometimes the franchisor does group training in one location. As part of the businesses model you have to participate and complete the requirements. You may not charge for the training, but you will incur the transportation fee, accommodation fee, and other day-to-day expenses.

Renewal Fee

Any franchise business agreement is valid for certain time. At the end of the current period both franchisor and franchisee have the right to continue to run the business or not. The franchisor and franchisee may rewrite the contract or modify the terms and conditions, etc. There is no guarantee from the franchisor that the business contract will be renewed at the end of the term and at the same time there is no obligation to the franchisee to continue to do business with the same franchisor. The franchisee has every right to take out that brand at the end of the term and get a new brand or run their own brand. However, most of the time, the franchisor may charge a one-time lump sum fee for each renewal of the contract. This is solely the discretion of the franchisor whether to charge or not, and how much to charge.

Recovery Fee

Sometimes the franchisor spends money for the upgradation of the business premises to keep it up to code and such development money will be collected under the name of a recovery fee. This is in the absolute interest of the franchisor how to collect and when to collect. The franchisee has to read and approve before they spend money from the franchisor.

Violation Fee

As per the franchise agreement, the franchisee has to follow the rules and regulations of the franchisor’s business model. If the franchisee fails to meet those conditions the franchisor may charge a fee of violation. This fee varies from franchisor to franchisor and also the amount varies from violation to violation.

Besides these fees, some franchisor’s collect more fees which varies from franchisor to franchisor. Whatever the fee, all will be reflected in the initial franchise application.

If you want to know more about franchise fee structures or have further questions about the franchise business fee structure, please contact us at help@bizworldusa.com or 415-234-8833 and one of our approved franchise business consultants will contact you.