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What Are Franchise Fees?

The first expense to a new franchise owner (franchisee) is the money paid to the parent company.  This is the franchise fee.  The prime benefit of becoming a franchisee is instant name awareness.  People are more likely to have their oil changed at a national chain rather than “Bob & Frank’s Lubetoreum.”  The parent company (franchisor) buys television, radio and print ads, driving customers to their local franchise locations.  You will enjoy the reputation of representing a highly recognizable company while being free to run your own show.

How Much Will I Pay?

Work-from-home franchises, often called mobile businesses, are generally at the low end of this spectrum – with fees as low as $10,000 or even less.  Franchises that fall into this category might include the following:

• Carpet cleaning
• Windshield repair
• Maid service
• Computer repair
• Vending machine operation
• Pet care
• Window washing

Franchises that demand a fixed retail location will usually charge higher franchise fees, anywhere from $35,000 to over $100,000.  Higher fees can be expected from nationally recognized names, while regional or local franchises will cost less.  Businesses in this category might include the following:

• Fast food restaurant
• Formal dining establishment
• Auto repair facility
• Dry cleaner
• Tanning parlor
• Tax preparation office
• Weight-loss clinic
• Veterinary clinic
• Shoe repair shop

 At the top end of the scale are lodging establishments – hotels and motels.  These franchise fees can easily top six figures and run possibly as much as $250,000.  It’s no surprise that these businesses are also the most costly to operate, but their potential rate of return is also very high.  Looking at the overall franchise market, the average franchise fee is generally around $20,000 to $30,000.

 What Do I Get For My Franchise Fee?

Companies use all sorts of criteria to decide how much to charge prospective franchisees. As a rule of thumb, the more a franchisor is willing to do to help you start and run your business, the higher the franchise fee.  The price will usually include training, oftentimes at corporate headquarters and in the company of other new franchisees, plus ongoing support and refresher courses.  Your franchise fee may also include assistance in selecting a building site, if your franchise requires a retail location.  If the price is low, however, the fee may only be a license to use the franchise name in your operation, and all other support will cost extra.

Your franchise fee also helps pay for a number of start-up costs incurred by the parent company.  They will use part of this fee to investigate your financial health, making sure that you have sufficient capital to operate the business.  Other parts of this due diligence process may involve a criminal background check or similar investigation of the ownership team.  If the franchisor has created proprietary software to be used in the franchise’s day-to-day operations – such as a payroll or inventory control system – part of your franchise fee will go toward licensing plus the lease or purchase of hardware to run these programs.  Finally, promotional materials may come with the start-up kit as well.

What Are Some Additional Franchise Expenses?

Depending upon the type of franchise you choose, additional expenses you pay before opening your doors can push your initial investment to many times that figure.  Other start-up costs may include:

• Legal fees
• Licenses
• Business and liability insurance
• Building rental or similar real estate expenses
• Training for the owner as well as for employees
• Equipment purchase or rental
• Inventory

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