Strictly speaking, a franchise fee is the money that a franchisee pays to a franchisor in order to join a franchise system and to gain the rights to operate a franchise at the beginning of their franchise relationship. It tends to be paid at the signing of the franchise agreement. Because it is a flat fee and allows entrance into the franchise system, it is typically a large amount. The fee may grant franchisees an operating manual, franchise advice from the franchisor, and initial training. However, the specifics vary from franchise system to franchise system. To determine what you should grant your franchisees in exchange for the franchise fee, you need to pay attention to standard franchising practice in your industry. Additionally, you should look at the specifics of your business to see what would work best for you.
The Franchise Fee, Other Fees and Their Importance to the Franchisor
When some people speak of a franchise fee, they usually mean it as a generic term. Rather than a one-time fee, they have in mind all the fees that franchisees pay to their franchisors through the course of their franchising relationships. These fees include the initial fee paid at the signing of the franchise agreement, as described above. They also include the royalty fees, which are paid on a regular basis (perhaps monthly, quarterly or annually) for as long as there is a franchise relationship. This royalty fee can be thought of as paying for exactly what is implied: the use of the copyrighted concepts or materials associated with the franchise company in the process of conducting the franchise. It is directly proportional to the amount made by the franchisee in sales. This is because royalty fees are calculated as a percentage of the sales. The more money the franchisee makes, the higher the royalty fees he or she pays to the franchisor.
As a franchisor, fees of this form will constitute your income from the franchise system. Hence it is important for you to set your franchise fee and other fees at a level that is commensurate with the opportunities and rights you are granting your franchisees. If you set your franchise fee too low, you may end up regretting this decision. At the beginning of the franchising process, the number of franchisees you will get is still not definite. Furthermore, you do not know for a fact what profits your franchisees will be bringing in. Setting your fee too low to attract potential franchisees could add up to the loss of hundreds of thousands of dollars in potential revenue if you succeed tremendously.