The decision to enter the world of franchising is one not to be taken lightly. Just the same, we know there are thousands of individuals across the country considering such a move for altruistic reasons. Perhaps they no longer want to work for others, but rather themselves. Perhaps they want to own something tangible that they themselves can grow into personal wealth. Or it’s possible they just desire the freedom that comes from having the ability to set a schedule of their own.
Still, we know that there are some factors holding these budding entrepreneurs back. And one of them, perhaps the most central, is budgeting. The world of finance can be a complicated and confusing arena. And the key question which must be addressed by a prospective franchisee is this: what, exactly, am I responsible for in a traditional franchising agreement? Let’s look at the facts:
Franchising is a grand bargain. An exchange of resources and capital in which both the franchisor and the franchisee enter into a mutually beneficial agreement. For the franchisee, the exchange includes brand awareness and a proven business system designed to succeed. For the franchisor, it includes fees and royalties. These initial franchise fees vary quite a bit when you consider that there are well over 3,000 different franchise concepts to choose from. But finding just the right one for your personal situation is the most important factor of all.
The initial franchisee fee (present with any concept) is covered by the franchisee once a franchise is awarded. What is consists of is the combined cost of the franchise brand, launch, training, site selection, territory definition, equipment and staffing. All these factors should be specifically mentioned and defined in detail in your franchise agreement. Which is why it’s so important to do your due diligence with this document under professional counsel.
Next up are royalty fees or payments. Almost every franchise has some format in which an ongoing payment is defined as a royalty fee. How it’s calculated can also vary franchise to franchise, but it’s usually set up as a percentage of gross sales revenue over a set period of time. This, also, should be expressly defined in your franchise agreement. Often, royalty fees can become part of the initial negotiation during a franchise’s purchase, with some brands waiving the fees for a determined amount of time. This is done in the spirit of growing the business, to see that new franchisees have the best possible scenario during their start up period. It’s not a given, however, so inquire before you sign on the dotted line.
Depending on the franchise concept, there may be additional ongoing fees, again—which must be expressed in writing in your franchise agreement. These may cover the cost of technology upgrades, additional training or other general business upkeep.
Advertising and/or marketing fees are also fairly common. These are usually set up either through royalty payments or other ongoing fees and they’re typically designed as a co-op program, where every existing franchisee in the system pays in to a pool for the greater benefit of the brand’s outreach.
As you can see, your budgeting responsibilities are pretty straightforward when you enter a franchise agreement with a brand to represent their company. While there is much variance in the associated costs discussed above, these types of fees are common to the franchising industry as a whole. Read any franchise agreement carefully to discern the key points.
If you’d like to know more about your financial responsibilities as you enter into a franchise agreement, we can help. Simply give us a call or fill out our Roadmap to Success form to get started with a no-cost, no-obligation visit with one of our qualified FranNet representatives. We have the answers you need!
Let’s chat! There’s a local FranNet consultant right in your market who knows that market inside and out – knows the personality of the market – knows the competitive landscape. FranNet has a great track record of assisting individuals on their path to entrepreneurship, and one of our franchise experts would love to provide you with guidance free of charge. Sound like something you might be interested in? Get started here and find your local consultant right now!