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How Franchise Fee Works

franchise fee

Franchise fee

Most, if not all, franchise opportunities require franchisees to commit to a certain amount of franchise fee. Many seem discouraged by the amount of franchise fees asked by the franchises (and some do charge a bit too much!), but you must view it as a necessary to keep your franchise unit and the whole franchise company afloat and maintain the quality level of products and/or services.

Now, the problem is, some franchises just don’t have a strong reason to charge franchise fee – a few is even making excuses, in which the real reason is to get a nice upfront cash to benefit the franchise company and its founders, while leaving you to run the franchise unit on your own.

So, if you are considering yourself a franchisee candidate, you must find out for ways to analyze the franchise agreement to determine whether you pay a reasonable amount of franchise fee or not – and ultimately, whether you should decide to buy the franchise or not.

Franchise fee 101

In layman’s term, a franchise fee is the fee charged by a franchisor for using its brand name. The brand value, reputation and awareness will determine the amount of the franchise fee. The franchise business system also drives up the franchise fee. McDonald’s is a symbol of global franchising success, and you can expect they ask for a hefty amount of franchise fee – it’s only logical.

Franchise fee is different from royalty. Franchise fee is a one-time payment, and you should consider it as a part of your business initial investment, whereas royalty re-occurs on regular basis (usually monthly.)

Consider this: Never tricked by a franchise company that pitches you with a super-low franchise fee. With such a low franchise fee, you should be aware the reasons behind the low franchise fee: Is it a new franchise? Is the franchise brand name that valuable and attract customers simply because of the brand name? Will the franchise promote the brand name well?

A franchise fee could also includes ongoing training and support, advertising and marketing fee (if it is not charged separately) and, of course, to help the franchise company stay afloat (you should not expect the franchise fee to be used 100% for the support and branding purposes – a franchise company is for-profit organization, naturally.)

Of course, the best way to understand what’s included in the franchise fee is to read and analyze the UFOC (and other franchising documents) well. The documents will help you understand your rights and responsibilities and it’s obviously important to view and review the agreements and documents before you sign any. The UFOC (should) outlines the usage of the franchise fees and royalties.

Is the franchise fee too much for me?

The amount of the franchise fee determined by the franchise brand name and system’s worth – They are largely intangible, subjective and relative. The best way to find out whether you pay the franchise fee too much or not is by looking for the right franchise information and compare the franchise fee of you interested franchise to other franchises’ that have the same niche to serve, target market and size.

Whenever possible, hire a lawyer who specialized in franchising (not all lawyers are franchising-savvy) to help you analyze and understand the franchise documents – including in making a judgment whether the franchise fee is acceptable and reasonable.

Ivan Widjaya
On franchise fee
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