What are Franchise Fees and How Much Do They Cost?

Welcome to another episode of Atlanta Franchise Today with host Leslie Kuban, expert franchise consultant and owner of FranNet Atlanta. Atlanta Franchise Today is dedicated to bringing entrepreneurs and business owners the best practices and tips for their franchise goals. In this week’s segment, Leslie focuses on franchise fees—what are they and how much will aspiring franchisees have to pay?

Transcription: 

Leslie Kuban:
Hey everybody. Welcome to another episode of Atlanta Franchise Today. I’m your host, Leslie Kuban. When you start exploring franchise opportunities, you’ll quickly discover that there’s various fees that you pay. Today, we’re going to focus on the franchise fee. What is it? What do you get for it? And is it worth it? I’ve talked a little bit about the franchise fee in a prior episode, but we’re going to dive deeper into it today. So the franchise fee is a one-time fee that a new franchise owner pays to the franchisor at the same time they are signing their franchise agreement. On average, it’s a 25 to $50,000 fee for a single location or territory. So what does it buy you? In short, it gives you access to the right to use all the collective intelligence that the franchisor brings to the table on how to start and run that business successfully.

Leslie Kuban:
A few examples would be acquiring customers. What are the proven, time-tested, cost-effective marketing lead generation and advertising strategies that bring customers through the door and keep them coming as repeat customers? If there’s real estate involved in your business, it’s access to all the intelligence and help on site selection, negotiating with the landlord and constructing your location, the build-out as we call it, in a cost-effective manner. Sometimes talent recruitment is a huge benefit. If there are employees involved in that business model. Who are the employees? How do you find them? How do you interview them? How do you advance and retain employees in that particular kind of business?

Leslie Kuban:
And then there’s all the technology that may be involved in operating that business. There sometimes are numerous technology systems in customer relationship management, in supply chain, in logistics. Many times these systems are integrated into an online platform that allows a franchise owner to run their business in real time from a cell phone or a laptop, not necessarily on site. Many times franchise companies, they may have been in business for five years, 10 years, 15 years before they start selling franchise licenses to new entrepreneurs, and they’re building and they are refining and they are improving these systems over time.

Leslie Kuban:
Many times it will cost a franchising company hundreds of thousands, even millions of dollars to create and improve these systems. That’s why I think it’s really important for new franchise owners to know that this franchise fee, while it’s a lot of money, it really isn’t a profit center for the franchisor. At best, it’s covering the franchisor’s costs to recruit, train, and support new franchise owners.

Leslie Kuban:
Where franchising make their money is typically an another type of fee called a royalty. It’s a long-term investment to be a franchisor, and we’ll talk more about royalties in a future episode. But the short of the story is that both the franchisor and franchisees are taking a financial risk every time a new franchisee comes on board. A very fair question is, is this franchise fee worth it? And I think an entrepreneur who’s looking at starting their own business in an industry that they’re interested in and comparing that to a business that’s a part of a franchise system in that same industry, you have to think about what is the value and what is the cost in your money, your time, your energy, and the mistakes that you’re going to make to create all of those systems that the franchise or already has?

Leslie Kuban:
In franchising we have an acronym for this key word system. It’s called saving you stress, time, energy, and money. So again, that’s a key evaluation factor that an entrepreneur needs to think about in determining if paying the franchise fee is worth it versus creating all of those systems themselves. A common question I’m asked is, is this franchise fee negotiable? And the short answer is it’s usually not. In fact, there’s very little that is negotiable in the fees or in the contracts with franchise companies. And there’s good reason for that. A franchise company needs to be fair and consistent across all of its franchise owners in its system.

Leslie Kuban:
Now, there oftentimes is a discount on the franchise fee for empire builders, people who want to expand into two, three, four locations. Most franchising companies would rather have one franchisee who owns three locations versus three franchisees who each own one. So there’s an incentive there. And franchise companies will discount that fee for people who are interested in agreeing to a multiunit agreement upfront. I hope this has been an interesting and useful episode. I really appreciate you joining me today. I look forward to seeing you next week on Atlanta Franchise Today.

Speaker 1:
Thanks for watching Atlanta Franchise Today with Leslie Kuban. This has been a JBF Business Media production.

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