Initial fee for franchise

Why is the franchise fee so expensive?

February 25, 2016 1:13 pm Published by 1 Comment

Prospective franchisees always want to know: “Why is the franchisee fee so expensive?”

Initial fee for franchiseAll franchisors charge a franchise fee, a lump sum of money that franchisees are required to pay upon signing a franchise agreement and prior to attending the franchisor’s startup training course. Typically, these fees range from $10,000 (sometimes less) to $50,000 (and occasionally even more). These are one-time payments.

By collecting the money upfront, franchisors avoid teaching franchisees their “secrets” and then trying to collect the fee afterwards. Franchisors also do not usually negotiate the franchise fee — franchisees pay the same amount, although this year’s fee may be different than last year’s fee.

Are franchise fees too expensive? 

Almost every franchise prospect tells me in coaching sessions, or at my seminars, that franchise fees are too expensive. But I say, “Compared to what?”

A good comparison would be the cost of starting the same business without a franchisor. In other words, you’re on your own. No one is going to give you a checklist of what to do, and you won’t have the opportunity to attend a training session where you can learn how to operate the business. Let’s take a look at what the costs might be.

Coming up with the idea

To start a new business you need an idea. With a franchise, the idea already exists, and, depending on circumstances, it’s been tested and hopefully proven to work. What’s that worth? Lots of people get stuck at this stage of business development. Even if you’re good at coming up with ideas, how do you know if the idea is any good?

Let’s assume you’ve got a great idea. How much will it cost you to develop the idea into a business?

Consider the cost of research, licenses, permits, making contacts with suppliers, hiring employees, finding a location, marketing, customer service, back office support, employees, etc. And we’re not talking about getting it all perfect. We’re just talking about getting started.

But getting started is also the most dangerous period for new business owners. You may not know the type of location you need until you’ve opened a couple of units and discovered which location works best. You may not know the type of employees you need, or how to train them properly, until you’ve hired and fired a few!

Now consider that a good franchisor provides startup guidance and solutions that should keep you from making costly errors. A good franchisor tells new franchisees how to select a location and how to hire employees who will be able to do the work of the franchise. What’s that worth?

The cost of attracting customers 

Every business needs customers. How will you attract them?

You’ll need to develop a marketing and advertising plan, possibly including print ads, television commercials, and social media. What’s your advertising expertise? You can hire an ad agency, but have you done that before? Have you negotiated media fees before? Good franchisors already know how to attract customers and they share that know-how with their franchisees. What’s that worth?

Do you know how to operate the business?

What’s your operating plan for your business? Who will do what, when and how?

Who can you rely on for equipment, supplies and inventory? You won’t have any buying power, so you’ll need to be prepared to pay full price.

Who will you call when you’ve got a problem? Good franchisors provide an operations manual with guidelines, recommendations and requirements to help you build your business efficiently. They also provide training and support staff to assist you not only during the startup of your business, but for as long as you’re a franchisee.

Again: What’s all that worth?

Franchise fee may be a bargain

If you add it all up, will you pay more or less money to startup an independent business? Suddenly, the franchise fee may look like a bargain.

You’ve also got to keep in mind that an established franchisor has buying power and that saves franchisees money. If you buy one ad in a newspaper you’ll pay full price. But if the franchisor is buying dozens or hundreds of ads annually in a newspaper, franchisees benefit from the discounted pricing. Same with equipment and supplies, including inventory.

When you compare total costs required to a franchisee fee, you will almost always discover that the franchise fee isn’t expensive after all. Of course, with an independent startup you can pay as you go – you may pay $100,000 over six months’ time to get your business off the ground. But you won’t feel the pinch of having to pay a $50,000 franchise fee in one lump sum.

Profit for the franchisor? 

In spite of the benefits to be garnered from a franchise, many people still aren’t sold on paying an upfront fee. Some are concerned that “The franchisor is making a huge profit from the franchisee fee.”

To which I say: “Is that a fact?”

I’m not being sarcastic. Is it a fact that franchisors earn huge profits from franchise fees?

Find out!

How is the franchise fee spent? 

Before you buy a franchise, you can ask the franchisor to show you how your franchise fee will be spent. Ask for a line-by-line itemization.

The franchisor will say, “We spend the money to train you.”

Great! But drill down. “How much of the fee is spent on training? And what, exactly, are you paying for? Are you paying the instructors? Paying for materials? Paying rent for the training center? Do you pay for breakfast and lunch?”

The franchisor will also say, “We provide you with support as you are getting started.”

Keep drilling down for info

Great! Again, drill down. “Show me what that costs, please. Who provides the support? When and how? What does it cost, exactly?”

Whatever the franchisor tells you, ask for more explanation. Franchisors know exactly how the money is spent, and a good franchisor has no reason to keep that information from you.

How much is re-invested in you?

You may discover that most of your franchise fee is re-invested in you through training and support. Bottom line: You’re paying for an education that will help you succeed in the franchise business. The information is specific and tailored to the brand that you’ll be operating. Now: What’s that worth?

And what if the franchisor makes a profit from the franchise fee? The franchisor tells you, “Twenty percent of the fee is profit.” Is that a reason to object to paying a franchise fee?

Should the franchisor make a profit? 

Before you answer that question, think about this point: If a franchisor doesn’t make a profit, how long will that franchisor exist to provide you with the expertise, guidance, knowledge, training and support that you need to succeed as a franchisee?

Do you really want to join a franchise company that doesn’t make a profit on its sales?

It’s true that some franchise fees are expensive, but your job is to figure out the value of the franchise fee. And by the way, some franchise fees are not worth paying, and that’s why it’s important for you to do this homework.

Need help investigating franchise opportunities? You can rely on two best-sellers to help you: 101 Questions to Ask Before You Invest in a Franchise, and Buy “Hot” Franchises Without Getting Burned

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This post was written by Dr. John Hayes

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