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What Do Franchises Typically Have to Pay the Franchisor?

What Do Franchises Typically Have To Pay The Franchisor

Starting your own business can be hard, especially with all the increasing competition. This is why many people choose to buy a franchise instead, because it allows them to set a business without having to start from nothing – they’ve already got an established name and support from an experienced franchisor.

However, buying a franchise is by no means easy, especially because of the costs involved. There will be a handful of different fees that you’ll need to pay the franchisor, so you’ll need a good deal of money before you even begin. Thankfully, knowing what kinds of fees to expect is a great help.

In our handy guide below, we’ve got a detailed look at the various franchise fees that you can expect to pay the franchisor.

What Do Franchises Typically Have to Pay The Franchisor?

1. The Initial Franchise Fee

We’re going to begin with perhaps the key fee that a franchise has to pay to their franchisor, and that’s the Initial Franchise Fee. There is no set or typical sum for this fee, since it varies between each company. As a result, you’ll want to research beforehand the particular franchisor that you’re looking to enter business with.

This is usually paid very early on, often around the time you’ve just signed the Franchise Agreement, which is the document between you and the franchisor stating that you have the right to operate the particular business. The Initial Franchise Fee will be a fixed sum, and its sum takes into account a whole range of different costs associated with the sale.

For example, the sum covers the cost of franchise operating systems, as well as the franchise relationship. Since you’re buying into an established name, it makes sense that it would cost some relationship money. The sum also covers the initial marketing materials and training services.

2. The Ongoing Franchise Fees

However, as you might expect, there are some ongoing franchise fees once you begin and continue running the franchise. This is understandable, since you’re still using the name and brand of the franchisor. There is no set sum for these, since it varies across all companies.

There are a few ways that these ongoing fees can be paid, though. For one, they can be paid as a fixed fee. However, on the other hand, they can be paid from percentages of income, with you giving the franchisor a fraction of your profits or sales. Whichever way you pay will not be up to you, rather the franchisor.

But what are ongoing fees themselves? They include a number of factors. For example, it covers the royalties and the marketing costs. On top of that, it can cover the amount that it costs to operate under the franchisor’s name, as well as the cost of your ongoing relationship in general.

Additionally, there are IT and administration costs. These fees will typically be paid individually, and at different times. For example, some may be paid monthly, while others are taken once a year.

3. The Fit-Out Fee

The Fit-Out Fee

Setting up a business is not cheap, because you have to fit-out the building with all of your equipment and branding. This means that on top of the initial and ongoing fees, you’ve also got to pay towards the fit-out of your franchise location.

Like the other fees, there is no set cost for a Fit-out Fee. However, in this case it is mainly because it depends on the equipment you’re being fitted-out with. For example, if you’ve bought a franchise that needs a lot of infrastructure, and the building is kitted out with lots of equipment, then the fit-out fee is going to be more expensive than a business with less infrastructure,

For this reason, hospitality franchises, like fast food restaurants, are going to have some of the more expensive Fit-Out Fees. They carry costs such as the operating equipment, like TV screens and cash registers, as well as the fit-out for the industrial kitchen.

On top of that, you’ve got all the counters, tables, and chairs. As you can imagine, the sign above the door costs money too. Interestingly, the franchisor will usually organize the fit-out itself, and then you simply pay the money back to them.

4. The Lease Fee

A franchise will need a building to operate out of, and therefore there will also be the question of the lease fee. These fees obviously have no set sum, because all buildings will carry a different lease fee. With that being said, the lease may be sorted out by your franchise or the franchisor. If it’s the former, the franchisor might help you negotiate the terms.

If it’s the latter, you’ll be having to pay the fee to them. However, the lease itself isn’t going to be the only fee involved. On top of that, you could expect to pay the rent for the place, as well as insurance. It may even come to you paying for repair fees to the leased space too.

5. Legal Fees

Finally, there is the matter of some legal fees that a franchise buyer might need to pay the franchisor. However, these are thankfully only under certain, limited conditions. For one, the legal costs need to be specified in the Franchise Agreement document.

Secondly, the legal costs can only be related to the preparation, execution, or negation of said Franchise Agreement. This means that the franchisor can’t make the franchise buyer pay any other legal fees, such as the ones associated with issuing termination notices, renewal notices, or other types of documents.

Final Thoughts

As you have seen, there can be a lot of fees that you have to pay when you buy a franchise from a franchisor. As a result, you’ll want to make sure that you’re getting all of the figures correct and not being taken advantage of. Always have a proper lawyer look over the Franchise Agreement before signing, and ensure all your fees are fair and accurate.