The Facts on Franchise Fees
Before you get into a franchise, you must know the costs involved. Without having an accurate picture of the finances, you could find yourself in trouble down the road because you weren't prepared and didn't plan ahead. Although each franchise has its own set of expenses and schedules, the following common facts about franchisee fees are something that all prospective franchisees should know.
Your Initial Franchise Fee
Your franchise fee at the start of your business is the cost of your admission to the franchiser's network, training and business system. This price varies greatly by business type and industry segment. Some franchises, such as mobile or home-based businesses, are on the low end of the scale, with franchisee fees of $10,000 or less. Larger businesses, such as hotels and full-service restaurants, tend to be on the higher side and can run into hundred of thousands or even millions of dollars. If you're buying a large territory, expect a higher franchise fee.
You might have to pay this fee in full upfront when you join the franchise or over time in scheduled installment payments. Some franchises offer financing to qualified franchisees through relationships they have with local banks or finance companies, so don't fret if you're not sure you can come up with all of the money at once. Check with the franchise you're interested in to see if they offer financing options.
The Royalties Rundown
Unlike the initial franchisee fee, which is one-time expense, your royalty is ongoing. This is a percentage of your gross sales that you pay to your franchiser on their schedule, which might be weekly or monthly. Royalty fees vary greatly by franchise, with 4 to 8 percent being average. These fees go toward expenses like your use of their trademark, ongoing support, training, marketing and other costs that come with building and maintaining a brand.
There are other costs involved in getting into a franchise, including legal fees, real estate and upkeep if you have a location in a permanent space, and inventory. To make the most out of your experience and plan accordingly, be sure you know what your costs are going to be and what your money is going toward before you sign with any franchise.
Don't just stop at the franchisee fee and royalties when you're looking at franchises. You need to know exactly what you're getting into financially before you sign the final papers, so get full fee schedules and disclosures from all the franchises you're looking into. Franchise specialists can help build an accurate picture of what you need to invest, saving you stress and financial distress down the road.
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