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Guide To Franchise Fees
Learn More About The Different Types Of Fees Associated With Owning A Franchise
For emerging and experienced business owners alike, franchising opportunities offer a great business model. Franchises offer a streamlined business model to remove most of the thinking and hard judgment calls out of running a business, along with built-in branding and product recognition. Additionally, franchises strike a great balance between independent business ownership, while providing a network of support from peers and people further up the chain to overcome any stumbling blocks that might present themselves. However, in order for franchisees to get access to all of the great benefits of buying into a franchise, they must pay franchise fees – and not many people know exactly where their franchise fees go, or exactly what they are getting in return.
What Are Franchise Fees?
For most emerging entrepreneurs, franchise fees mean the initial investment required to buy into a system. All franchises charge a flat fee so people can begin setting up their own operations. On a more granular level, there are number of franchise fees along with the initial buy-in rate that cover a number of services.
The royalty fee is standard in every franchise agreement. This franchise fee is how every franchisor makes money. The amount and frequency of the royalty payment varies from franchise to franchise. Some require a monthly payment, while others are on a weekly schedule. The amount of each payment is typically a percentage of the total sales made within each period. There was a time when payments were made by mailing a check, but in this digital age, payments are taken out electronically – either from the business bank account, or from the total sales at the end of the day, week, month, or quarter.
The advertising fee is separate from the royalty fee, though it is usually configured the same way. Another percentage of sales – on the same schedule as the royalty fee – though the money goes for a different purpose. The advertising fee is part of a large pool for (as you would expect) advertising campaigns and materials. This franchise fee not only goes toward the production of signs and merchandise, but also shipping and placement in the franchise operation.
Over the past few years, franchisees in some states have been reclassified. No longer are they considered independent business owners, or contractors operating under the trademark of a parent corporation. In a number of states, franchisees are considered employees of the franchisor, and are paying taxes accordingly. This can hinder (if not completely remove) the sense of independence. The credit for your achievements goes right to the parent company, and the taxes you pay can be severely impacted. Make sure your franchise attorney is also well-versed in the tax laws of your state (or consult with a CPA, at the very least) to see if opening a franchise will mean you are classified as a business owner, an independent contractor, or an employee of the parent corporation.
These Are Not Optional
Both the royalty and advertising fees are not optional when entering a franchise agreement. In very basic terms, the former gives you access to the franchise. You get to use the franchisor’s name, sell the franchisor’s products or services, and be a part of the franchise family. The latter fee allows you to advertise products, specials, and utilize branding to bring in customers. These two franchise fees are standard in any agreement with a franchisor. Sometimes (though not always) not paying the fees can result in penalties or a complete loss of ownership in the operation.
But What Are You Getting In Return?
This is a very valid question. Most franchisees should know what they are getting in return for their money, other than the privilege of joining a club, so to speak. Before entering any franchise agreement, consult with an experienced franchise attorney. Franchise fees and guidelines are all basically the same from franchisor to franchisor. However, franchise agreements differ in many ways from typical business contracts. Listen to your franchise attorney. Do not seek guidance from franchise brokers, as they are salespeople working for a commission from the parent company. The last thing you want to do is end up locked into an agreement that is not beneficial to you or your finances because you skipped a phrase or two in the fine print of a contract.
The Uniform Franchise Offering Circular
The Uniform Franchise Offering Circular (UFOC) is a standard legal document which details the financial obligations franchisees have to franchisors. The UFOC also lists the specific franchise fees, the amounts (or percentages), as well as what the franchisor will provide in return for paying those fees. In most UFOCs, the list of things franchisees will receive in return for their regular franchise fees are usually listed in Section 11. The list of services and assistance provided by franchisors typically consists of the following:
- Proprietary software
- Operation manuals
- Training for managers and other staff
- Training on grand openings and marketing campaigns
- Inroads to acquire equipment, fixtures, and even inventory
- Sources for vendors
- Detailed metrics and demographic analysis
- Construction assistance
- Access to the franchisor’s name, branding, and overall system
The age of the franchise system you are buying into usually determines the depth of assistance you will receive. Most successful and mature franchisors offer training that may seem like baby steps, at first. The reason for this is that they want all franchisees to be on the same page, and to make sure no possible questions are left unanswered. Major franchises may offer training at their corporate offices before moving onto on-the-job training.
More established franchises will often go beyond the basics listed above, and will offer additional services. This is all in an effort to continuously make things more streamlined and profitable for franchisors and franchisees alike. In these cases, franchise fees also go toward:
- System-wide marketing and placement
- New product and service research and development
- Market research
- Merchandising standards
- Frequent updates to the operations manual
- Establishment and maintenance of a franchisee advisory council, so franchise owners can participate directly in the management of the entire franchise system.
- Counseling and support so franchisees can improve their individual operation or to overcome obstacles
As we stated above, this is a very generalized list of features provided with franchise fees. More mature franchises will almost certainly offer the above services, if not more. Newer franchisors may have leaner and more agile systems, and therefore have no need of the above bullet points. Because of this, always go (with your attorney) over the list of services you will be charged for, and which ones are built into the franchise fees before signing on the dotted line.
Assumptions Can Be Costly
No two franchise agreements are alike. Similarly, the services and benefits offered through franchise fees differ between agreements. Unless it is explicitly stated in the agreement, you cannot guarantee those services are offered, or attempt to interpret the agreement without the assistance of a franchise attorney. Larger franchises tend to cover all the bases. Small and newer franchises may not offer the same benefits, but the terms of the agreement may change over time, as the parent company grows and finds itself in the position to provide new perks and requirements. Franchisors do not want people agreeing to franchise fees and obligations they cannot commit to. Similarly, emerging entrepreneurs, such as yourself, do not want to get tied to a contract that restricts revenue, or has obligations you cannot fulfill.
Opportunity Similar To A Franchise, But Without The Fees
The Commercial Capital Training Group (CCTG) offers great opportunities for those still sitting on the fence about owning a franchise. We specialize in commercial finance – offering the chance to own our own business, set your own hours, and achieve full financial independence. With low overhead, built-in branding (of your own), marketing, and 24 hour support, CCTG offers more benefits than a traditional franchise operation.
We will provide the training so you fully understand how the world off commercial finance works, and how to generate the most revenue for your efforts. We will also give you access to our board of lenders. With over 80 years of experience working in commercial finance, and getting business owners in every industry the capital they need – they will be available to answer all questions and help you overcome any obstacles that may turn up when dealing with your clients.
Unlike franchises, everything we give you is yours. Your business name. Your logo. Your branding. Your influence in local, national, and even international markets. We provide the tools, training, and around-the-clock support. All you have to do is resolve to take that leap into business ownership and achieve that dream of financial independence. We offer the support network and training, much like a franchise. However, we are very much unlike a franchise because all of your successes, revenue, and clients are yours. To learn more about what The Commercial Capital Training Group has to offer emerging entrepreneurs, contact us today!