What’s a franchise fee worth?

Every franchisor charges a franchise fee, a lump sum of money that you’ll be required to pay when you sign a franchise agreement. Typically, these fees range from $10,000 (sometimes less) to $50,000 (rarely more), and they’re paid in advance of attending the franchisor’s initial training classes. By collecting the money upfront, franchisors avoid teaching their “secrets” and then trying to collect their money. They also do not negotiate the franchise fee – everyone pays the same amount.

Is it too expensive?

You probably expect to pay a franchise fee, but if you’re like many other prospects you’re wondering: “Why is the franchise fee so expensive?” It’s one of the most common questions asked during The A to Zs of Buying a Franchise, the most popular symposium offered at expos produced by MFV Expositions.

To answer that question, it’s helpful to ask another question: “Compared to what?” When people say the franchise fee is too expensive, what are they comparing it to? A good comparison would be the cost of starting the business independently, without buying a franchise. So let’s take a look at that.

To start a new business you need an idea. With a franchise, the idea already exists, and it’s been developed as a real business. What’s that worth?

Cost of developing an idea

But let’s say you’ve got a good idea. How much will it cost you to develop the idea into a business? Consider the cost of research, licenses, permits, making contacts with suppliers, hiring employees, finding a location, etc. And we’re not talking about getting it all perfect. We’re just talking about getting started, during which time trial and error can cripple a new business.

You may not know the type of location you need until you’ve opened a couple of units and discovered what’s wrong with the locations. You may not know the type of employees you need, or how to train them properly, until you’ve hired and fired a few! But that’s not the case with franchising. A good franchisor provides guidance and solutions and keeps you from making costly errors. What’s that worth?

The cost of attracting customers

Even the best of ideas and businesses need customers. How will you attract them? You’ll need to develop a marketing and advertising plan, possibly including print ads and television commercials. What’s your advertising expertise? You can hire an ad agency, but have you done that before? Have you negotiated media fees before? Good franchisors already know how to attract customers, and they know what it will cost. What’s that worth?

What’s your operating plan for your business? Who does what? When? How? Who can you rely on to provide equipment, supplies and inventory? Who can you call when you’ve got a problem? Again, good franchisors provide an operations manual with guidelines, recommendations and requirements to help you build your business efficiently. They also provide training and support staff to assist you not only during the start-up of your business, but for as long as you’re a franchisee. What’s that worth?  

Profit for the franchisor?

In spite of all the benefits a franchise fee produces, some prospective franchisees still aren’t sold on paying the fee. Some claim, “The franchisor is making a huge profit from the franchisee fee.” Is that a fact?

Before you buy a franchise, you can ask the franchisor to show you how your franchise fee gets spent. You may discover that most of your franchise fee is re-invested in you through training and support. In other words, you’re paying for an education that will help you succeed in a business of your own. What’s that worth?

And what if the franchisor makes a profit from the franchise fee? Do you want to join a franchisor that doesn’t make a reasonable profit? How long will that franchisor be able to provide you with the expertise you need to succeed as a franchisee?