Oftentimes, when researching franchising, it is easy to get confused by the terms “franchise fee” and “total investment”. It is not uncommon for there to be a misunderstanding between the “franchise fee” and “total investment”. So let’s clear it up.
And while we are at it, let’s also talk about the term “royalties”.
The Franchise Fee Definition:
The franchise fee is one of the most well-known term and is a one-time fee that someone pays to become part of your franchise system. It is NOT just an arbitrary fee intended to generate profit. The franchise fee is payment, in part, for expenses incurred by you (the franchisor) for all onboarding, training, assistance and guidance you provide to a new franchisee. In other words, this is a fee to reimburse you for your actual costs associated with bringing someone new into your system while helping them open their business.
For example, the franchise fee reimburses you for your time while on-boarding the franchisee, the training program you and your team will provide, website you provide to franchisees, advertising and marketing materials given to your franchisee to help kick off their business, access to proprietary software and in some instances a small inventory of start-up supplies. The franchise fee also covers your legal expenses, accounting, background checks and other professional fees you incur when brining on a new franchisee (learn more about the franchise fee).
Franchise Total Investment Definition:
The total investment is substantially different from the franchise fee. The total investment is a dollar amount (often expressed as a range) that a franchisee should expect to spend in total in order to start their business and immediately begin to generate revenue.
In the Franchise Disclosure Document (FDD) you are required to provide your prospective franchisee applicant with an Estimated Initial Total Investment that a person can expect to spend OR has to spend in order to open for business. This total investment includes the franchise fee as described above, along with other expected expenses such as:
- real estate (how much to lease property
- technology items needed
- budget for leasehold improvements
- equipment needed
- start up inventory
- budget for grand opening
- insurance costs
- labor or staffing estimates
- working capital and anything else necessary to open the business.
So depending on your type of franchise, the total investment can vary greatly between businesses.
Franchise Royalties Definition:
Royalties come into play after your franchisee has launched their business. A “royalty” is an ongoing fee paid to you for your continuous operational and marketing support and assistance to the franchisee.
Royalties can be a percentage of the franchisee’s gross revenues (not profit), a flat fee or both, and continues for the term of the franchise (learn more about royalties). Royalties can be paid weekly, but most commonly are paid monthly. Over time, royalties are where you make your money!
Thinking About Franchising Your Business? The Franchise Maker Has You Covered!
At The Franchise Maker, we work hand-in-hand with you so you fully understand these terms and all the mud puddles to avoid when franchising your business. We work with you to determine all of the details necessary to build a comprehensive franchise program that protects you and your trade secrets. And most importantly, prepare you to be self- sufficient so you do not have to depend on anyone for your franchising activities later (read about our strategy when franchising your business).
If you are thinking about franchising your business, call us directly at 1-877-615-5177 and we will be happy to answer any of your questions!
- How the Cost of a Franchise is Determined
- What are the Elements of a Franchise Disclosure Document?
- Do I Need a Local Franchise Development Company?
- Why Choose The Franchise Maker to Help You
- See the Steps How to Franchise
- Franchise a Restaurant
