What are franchising fees, how do they work and why do they need to be paid? Those who have a marketing or business vision know that to earn profits, a large distribution base be it via sales, services or information needs to be developed. It is the cost to obtain the right to copy or open a store or service venue under a known name.
These are basically the cost of doing business.
- Function is the first reason for paying a franchise fee. This fee is a revenue stream for the franchisor, but it is also a fee for entering into a business venture. Basically it is a part of the cost of doing business.
- The benefits of paying a franchise fee include have a sound licensing agreement which includes the right to use the franchise or parent company name and logo. Location scouting, equipment and training should be included in such fee. The basic model of the business is also provided via a franchise fee.
- These are usually one-time fees with royalties and/ or profit-sharing as additional payments after the business is established. This fee is required to be paid upfront and is a guarantee that location, customer base and marketing information will be provided.
- It is also a form of quality control for the franchisor. This fee can be quite expensive but provides and maintains a barrier to competitive entry and possible fraud. This is a protection and an actual guarantee that the franchisee will consider the business as a personal investment and will work to make it successful. Often franchise fees are non-refundable; however, this can be negotiated.
Most such payments are based on notoriety or the reputation of the franchise. The more recognizable the parent company is, the higher the franchise fee can be. The fee is also dependent on the support needed, equipment, training and inventory. There are times when the fee will be inclusive or simply a fee to market the franchise name; the rest of the costs are left up to the franchisee.
When negotiating a franchise fee, make sure it is written down in the contract and note the responsibilities of the franchisor and the franchisee. Do not leave anything to change or a simple handshake. Develop the franchise fee to be market friendly and to include business perks. And make sure to hire an attorney to go over all of your contracts and other documentation. Each province’s laws may vary, so you make to make sure your franchising set up and fees are in compliance with local laws. You don’t want to have your business built on sand, but on sturdy concrete instead. So seek legal help from the get-go.