Why On Earth Would I Pay A Franchise Fee?

In dealing with clients, without a doubt the most common objection to choosing to purchase a franchise is the concept of paying a franchise fee. To many, especially those that have never owned a franchise, the concept of paying a franchise fee can be puzzling, overwhelming and sometimes even borderline insulting. Before I address the value in franchise fees and some tips on comparing them, I’d first like to make a few points about franchise fees in general.

What is a franchise fee?

A franchise fee is a one-time fee charged to a new franchisee when purchasing a franchise. Franchise fees can range from a few thousand dollars to over $50,000 depending on the franchise, with an industry average currently around $30,000. Franchise fees are usually paid at the time of signing a franchise agreement and in most cases, non-negotiable, at least in the case of single unit franchises. Provided the franchise is truly a strong opportunity the franchise fee is a legitimate fee and despite what many people believe are rarely a profit center for the franchisor.

What does one get for the franchise fee?

When exploring a franchise opportunity it is important that you know exactly what you are getting for your franchise fee as what’s included and the true value of each will vary from franchise to franchise. The most common things that are offered in return for a franchise fee are inclusion in the system, rights to use a franchisors brand, trademarks, marketing materials, etc. Franchise fees also typically include comprehensive training to run the business, access to proprietary systems and business processes, rights to utilize negotiated vendor products and services, software, operations manuals and location selection and build-out assistance. While these are the more common things included with a franchise fee sometimes franchisors will include other items and services such as a grand opening campaign, computers, software and supplies for the trade.

Is there really value in a franchise fee?

The honest answer is with all franchises, not necessarily, but for a true world class franchise the answer is almost always a resounding yes. What I like to have my clients do is create a comparison checklist of what’s included with a particular franchisor’s franchise fee and the costs associated if they started an independent business and went out and purchased equivalent products and services.

Some Examples…

How well known is this franchisor’s brand? Not just across the country, but in my desired market. How much would I invest to create a brand this well known in my market place? Branding is not cheap nor created overnight so sometimes the answer to this question is in the millions and would take years to achieve.

Knowing what I know now, how much teaching and training would I require to be as prepared and educated to run my business as competitively as if I were a franchisee? There are consultants, courses, associations, books, etc. to teach just about anything these days. If you did enroll in some sort of educational service or hired consultants to teach you this business how much would it cost you? A few hundred? A few thousand or tens of thousands?

Who will help me design my corporate identity, logos, color schemes and marketing materials? Could you just sit down at your computer and create your own or would you hire a professional agency to assist you with this?

Who will help me choose and design my store or location? Provided your business is a location based business you will want it properly designed so that it flows correctly for your customers, while also meeting any safety requirements for both clients and employees. How much will an architect or consultant charge for this?

How much will software cost to run my business? Does your potential franchise offer you proprietary point of sale and operations software or is it off the shelf? If you went the independent route how much would this software cost?

What’s the value of any pre-negotiated vendor and supplier services? Many franchisors have the ability to leverage group buying to negotiate attractive rates for products and services required to run your business. What is the value of that? If you didn’t have the group buying leverage how would it affect your break even point and profit margins?

What else is included in the franchise fee and how much would it cost if I just went and bought it? Take a look at anything else included in the franchise fee and simply tally up the retail prices for such products and services. How much would you be investing?

Maybe that franchise fee isn’t such a bad deal after all?

Yes, there are plenty of franchises out there that consider their franchise fee little more than the price to play but with a strong franchise opportunity I find that far more often than not, the independent route would cost exponentially more to acquire the same products, services, training, branding, etc. that’s included with a franchise fee. Of course you can always just “wing it” and build a business on a shoe string budget but most consumers are attracted to polished and professional products and services and tend to be brand loyal shoppers. If you are wanting to start a business on the same competitive level that a world class franchise can offer I think you will find that most franchise fees actually offer a tremendous bang for your buck!