Pepin Valley Consulting The Franchising Specialist
Why pay Franchise fees, Royalty fees and Ad fees?
Most franchisors will charge fees. The Federal Trade Commission requires that all franchisors must give prospective franchisees a Federal Disclosure Document (FDD). In the FDD the franchisor must list any and all fees associated with owning the particular franchise. The most common fees are a franchise fee, royalty fees and ad fees.
Franchise Fee - The franchise fee is a one-time fee that is usually paid at the time the franchise agreement is signed. This fee can be anywhere from thousands to tens of thousands of dollars depending on the franchisor. Because the needs of franchises differ with their business models (i.e. a home based franchise will not need site selection) exactly what the franchise fee covers will differ from franchise to franchise. The list below includes things that are commonly covered by franchise fees:
- Registered trademark and logo: You get to use the brand name so strategically cultivated for the niche market your franchise represents.
- Initial training: As an owner you are learning from the franchisor what you need to run the business. Marketing strategy, sales techniques, H.R. support, policies and procedures, technical training, whatever areas you need help in to make you an all around effective small business owner.
- Travel and Lodging: To where the training is being held.
- Operation manual: Written instructions on how to run the business on a daily basis.
- Operational tools: Most commonly a computer and company software specifically designed to help manage the day to day operations of the business.
- Training materials: To train future employees
- Grand opening marketing strategy and supplies: Anywhere from direct mailing campaigns to cold calling blitzes to media coverage, whatever works best for the given franchise you have joined
- Business planning: Franchisors can help you put together a business plan because they know what banks are looking for but, best to listen to the advice of a qualified, third party accountant to assist in the financial analysis portion of the plan.
- Site selection: Through trial and error they know which site locations work best for their particular brand
- Lease negotiation: Franchisors typically have real estate experts who will help in the negotiation of a lease. Also, landlords know franchisees generally are more successful than independent businesses so will offer more favorable terms to a franchisee.
- Build out specifications: Franchisors will already have detailed blueprints on the stores floor plan. They will know common city ordinances and health codes etc. and have that built into the plans already.
- Product vendors: Some franchises have set vendors you must use; others have suggested vendors you can choose from. Both will get you proven products that sell.
- Service vendors: What services you will need will depend on the franchise. These could be anything from toll-free phone numbers, to display needs to insurance.
- Protected target market territory: A protected area with enough potential customers to support your business
In summary, what you are getting for your franchise fee is the guesswork taken out of your business at start-up, the most critical time in a business’s lifecycle. With guesswork taken out, you will make fewer costly mistakes and can concentrate on the new business.
The royalty fee is usually a percentage of the sales you make on a monthly basis. Sometimes it is a fixed amount. These fees are used on behalf of the franchises to:
- Support operations: As a franchise you will continue to get assistance from the franchisor for everything from “benchmarking” to financial reviews, H.R. inquiries or other continued assistance you need beyond the opening.
- Research and development: Rarely does an independent owner have the time or resources available to spend on research and development. Because of the mass accumulation of royalty fees, the franchisor can bring to market proven new products and cutting edge technology keeping the franchise in the fore front of the industry.
- Industry regulations: The franchisor can help keep you informed and compliant with industry standards and government regulations.
- Maintain the health of the franchise company: The franchisor relies on royalties for its revenue. The health of the franchisor is tied directly to the health of the franchisees.
The ad fee is fees set aside, most commonly for T.V. radio, print and the internet to:
- Advertise the business: To help stimulate sales.
- Promote the brand name recognition: The economy of scale of a franchise allows for a far larger promotional campaign then any one owner could afford on their own. This allows for the advertising on a national or regional scale that eventually leads to a brand name. However, it is critical to know if funds from this fee will be used to target customers in your area or if you will be expected to that on your own with different funds.
In the end what it comes down to is that there is value for these fees, but is the amount of the fee worth what you’re getting for it? In other words, what is the better value to you in your individual circumstances? Do you know enough about the industry that you could get the same or more use out of the money without paying the fees or; in order to be a business owner do you need/want what the above fees offer?