What Is a Franchise Fee?
Successful entrepreneurs know they can't be everywhere at once. So, once they've developed a successful concept and mastered the system for operating the underlying business, they will then sometimes sell the right to duplicate the business in other areas. This process is called franchising, and the initial cost to obtain the rights to open a store under a franchise is the franchise fee.
-
Function
-
For the franchisor, the owner of the franchise, the franchise fee charged of anyone who wants to open new stores is yet another revenue stream, another way for him to monetize his brand. For the franchisee, who pays the fee, it is a necessary cost of entry into a specific type of business. Many of the most nationally recognizable "chain" stores are propagated throughout the country and the world, at least in part, through a franchising system.
Benefits
-
The details of any franchise licensing agreement will vary, but in general, the franchise fee purchases the right to use the franchise name for business purposes. Other benefits such as training, location scouting, and equipment can be included in the franchise fee or assessed as additional costs. The franchise fee typically covers the expense of processing the franchise agreement and other research that may be associated with the process.
Types
-
The franchise fee is only one kind of payment a franchisee will pay to a franchisor. The franchise fee is usually a one-time, upfront payment that helps get the new franchise started. In addition to the formal franchise fee, the franchisor will also collect regular royalty payments either as a flat fee or as a percentage of revenues. An advertising fee may also be assessed to help pay for national and regional advertisements by the franchisor that benefit all franchisees. These ongoing fees are part of the cost of running a franchise, but are not formally considered part of the "franchise fee."
Significance
-
The franchise fee is a type of quality control for the franchisor, since the fee can be quite expensive for the better-known franchises. Maintaining a significant barrier to entry ensures that only the most serious franchisees succeed in opening a store, the operations of which could influence public perception of the franchise as a whole.
Considerations
-
In general, the more widely known the franchisor, the higher the franchise fee will be. Also, the extent to which the franchisee depends on support from the franchisor, for merchandise, equipment or training, will affect the franchise fee and other costs. In some cases the franchise fee will be very inclusive, while in others the franchisee will be left to cover a wide variety of other start-up costs. When considering licensing a franchise, a buyer should be aware of exactly what comes under the franchise fee and what the other costs will be.
-
