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.
The level of excitement in the start of a business is usually higher. Entrepreneurs want to invest all of their efforts to bring a successful business model. However if you are planning to go for franchising then it is quite crucial to determine the initial franchise fee. Although franchise fee is the primary concern of buyers who pay this fee during the franchising deal but a proper estimation is necessary for the franchise owner as well. We have enlisted certain factors that play key role for both sellers and buyers.
Franchise Fee Estimation for Buyers
- A well known franchise usually costs more at the initial stages. The seller will try to sell the name of the company at high rates. However if you want to go for cheaper rates at the start then you should go for a less familiar name. Big companies sell their name in return of huge sum of money.
- The next important factor in the estimation of franchise fee is the franchise support provided at the launch of your business. A new business requires proper training of the employees moreover you will get support in the initial weeks about tools required for training.
Franchise Fee Estimation for Sellers
- Most franchise seller try to earn huge profits at the start of a franchising deal. They either try to cash their company’s reputation or their good will in the market. However a better approach is to make profit from the royalties of the products instead of a huge sum of money for their company’s name. This step will attract many passionate entrepreneurs and the business will grow tremendously.
- Franchise sellers often go for consultants where they pay huge sum of money for trivial jobs. However a new paradigm shift is now taking place through online manuals. These manuals provide in-depth solution for all the major and minor events in the franchising work. A simple and quick way to estimate franchise fee is also available through a high quality Franchise Operations Manual.
You can also download 100% FTC Compliant Franchise Disclosure Document (FDD) Template which will ensure a smooth business deal for very decent rates.
There are several other expenses involved in the franchise start up costs and franchise fee is just one of them. To gain a better understanding of the costs involved a franchisee should examine the associated key factors. If you can estimate roughly how much do you need to raise a good franchise then you can collect the required capital accordingly. One way to determine the franchise start up costs is to go for lawyers and consultancy companies but this option costs way too much. However there is an alternative of online manuals. These manuals provide in-depth knowledge and methods for all the associated problems.
- Franchise fee is the principle factor that determines the franchise start up costs. You should always bargain at this point to save your valuable money. There are some companies which don’t show any flexibility in their franchise fee however most of them are willing to negotiate. Never miss a chance to save money right from the start.
- A franchisor usually offers a package at the start of a deal. This package covers all the essential items required to run a franchise smoothly. However franchisor often keep high margin of profit in these packages. It is not mandatory for a franchisee to choose this package. All the contents of this package are easily available in the market and by spending little amount of time you can lower down the franchise start up costs.
- There are several other factors that determine the expenses including purchasing of a building, maintenance of the equipments etc. To grasp the full extent of this matter it is strongly advised to go for a legitimate Franchise Operations Manual immediately. This manual clearly demonstrates how to estimate the franchise start up costs in detail.
- Preparation of legal documents through a consultancy company can increase the franchise start up costs. However you can go for Franchise Disclosure Document (FDD) Template which comes in customizable Microsoft Word document format.
Franchise agreement form varies from country to country and different states have their own version of it. However these variations are only limited to the format of the form and the contents are almost identical in them. There are certain attributes that remain same in all the forms. It is not necessary in today’s competitive world to spend hundreds of dollars on some lawyer to take care of your franchise agreement form. You can fill this form on your own without spending too much money through easily available manuals that are designed to instruct franchisors in these matters.
- As a franchisee you should know that franchise agreement form is the place where you have to write franchise fee and other related expenses. All the bargaining should be done prior to this stage. The franchisee can determine the costs based on the well known factors. These factors are clearly mentioned in the Franchise Operations Manual. Through this manual you can easily estimate the initial costs with simple techniques.
- The franchisor is liable to write all the details of the service that he/she is bound to provide. Remember franchise agreement form is a legal documents and the state is legally responsible to enforce anything declared in this document.
- How the franchisee is liable to promote the brand is mentioned in this form. This promotion is usually done through advertisements and both parties must agree on the amount of advertisement in this document.
- A segment of the franchise agreement form is responsible for the site location. Parties must have to agree on who is responsible for the site selection in this form.
- One way to pay full attention towards this form is to prepare all the associated documents quickly. You can concentrate on the contents of franchise agreement form after filling the Franchise Disclosure Document (FDD) Template. This template quickens the overall process of franchising for very cheap rates.
It is a well known fact that franchise fees are seeing a growing increment in this decade. What should you know about the uncertainties involved in this process? How can you make wise decisions in this department? We provide a fair quick analysis on the subject of varying franchise fees for different ventures in this article!
Introduction to the Basics
The upfront cost paid in the process of purchasing a franchise business is technically known as franchise fees. This includes the expenditures related to the preliminary support necessary for a new business. Franchisers usually go for an expert advice when it comes to these fees but now it is possible to make a decision on your own. There are several factors that should be considered in determining the initial cost of the business. However this fee varies from business to business and it is probably a good decision to learn about different franchise fees before going for a deal.
- The owners of a business should not charge heavily at the start of franchising and they should go for the money generated from the royalties of their products.
- Profitability of a business is an equal important factor in determining the franchise fees and it should be considered at all the levels.
- The difficulty arises when franchisers don’t have enough statistical data to back their decision. In this case fees are generally lower because the business has no proven record in the market.
- The business owners try to incorporate the initial costs in the franchise fees. If their business is a successful one then they will try to capitalize this opportunity.
- Successful business owners have always determined a minimum profit and in many cases it stays around 20%. Young businessmen can determine this profit by going through relevant businesses and their franchise fees.
Experts have designed a Franchise Operations Manual to solve all the above mentioned problems with the franchising. Moreover you can get a 100% FTC Compliant Franchise Disclosure Document (FDD) Template for a very reasonable price that will quicken the financing process.