When you buy a franchise, you are buying the right to use a company’s name and its business model. In return for this license, you agree to pay the franchisor a fee.
This is called a franchise fee, and it is one of the main sources of revenue for the franchisor. They can range from just a few thousand dollars to hundreds of thousands of dollars, depending on the size and scope of the franchise.
If you are thinking about joining the franchise system, it is important to understand all of the fees involved. This will help you make an informed decision about whether or not a particular franchise company is right for you.
So let’s take a closer look at franchise fees and what they entail.
This is not the only fee you will pay when you wade into franchise ownership. You will also have to pay for things like franchise royalties, marketing fees, and to cover costs from your initial investment.
But the one time fee is the upfront cost that gives you the right to use the franchise’s name and business design. You can find it by reviewing their franchise disclosure document.
Other initial services covered by the franchise fee:
- Training costs once you become a small business owner
- Development of the franchise location
Ongoing support for the business you’ll need to spend money on:
- Travel costs
- Sourcing materials (product-based company only)
- Technology fees
As you see, the total upfront cost that a franchisee pays will vary. Because of this, talk to a legal expert like us before you sign a binding agreement with the franchisor.
Besides brand recognition, a franchise fee grants you access to the intellectual property of a successful business. There’s your justification for taking this all-important step.
Since we already addressed what’s included in the franchise fee earlier, let’s instead focus on two other ongoing fees. The Small Business Administration (SBA) provides some helpful information on them both for a new franchisee.
Collected on a monthly basis, royalty fees are a form of ongoing franchise fees and are a necessary expense. Your royalty percentage will depend on the type of business you run. For example, a service-based industry may pay 12%, while a product-based one pays 5%.
Most franchisors earn their profit from this regular payment. Not the initial franchise fee.
These will also be based upon your gross revenue. It’s meant to support the franchisor charges for your initial advertising. And the ongoing expenditure.
Early on, when you were researching possible opportunities, hopefully you didn’t just talk to new franchisees. If you had broadened your search to a more established franchisee’s business in the same industry, your picture on these marketing fees is now more clear.
Any anticipated financial returns will look more promising if you hear they received a solid ROI on the current marketing.
Talking to a franchise attorney can help you reach your desired financial results. That can include advice about certain tax breaks for your franchise business.
But, your initial fee is not tax-deductible unfortunately.
You can however, take a depreciation tax deduction annually for 15 years. That’s because the IRS asks you to amortize the franchise fee over this time period.
How much can you amortize? Take the total franchising fee and divide by 15 to get your annual depreciation figure.
A franchisor sets the initial fees so the franchisee has a consistent way to pay commissions. Normally they are not negotiable.
Franchises don’t like to offer a varying fee structure. The reason being it may be misinterpreted as favoritism and get the franchisor in legal trouble.
One exception to the rule is when you’re joining a new franchise. Here lies your best bet in setting your own fee structure.
Franchises in their early stages may not be able to offer a high level of initial support to prospective franchisees. In that case, the upfront franchise fee may have some wiggle room if negotiated wisely.
First off, know that your business relationship will suffer should you miss the defined period for paying your franchise fee.
The time you have to pay will be outlined in your franchise agreement.
Should payment consistency become an issue, the franchisor may only provide initial support. Beyond initial training, they may wonder if they should continue investing in you.
Service marks against you could accumulate as your franchisee fee goes unpaid. Worst case, you could face financial penalties from legal action.
Franchise agreements that are breached may become null and void.
One suggestion if you’re in this situation is to be transparent with the franchisor. Should you have a valid reason, there’s a chance your business relationship qualifies for suspended payments.
And once your revenue increases, you’ll be expected to resume covering your ongoing fee.
Sometimes, both the franchisee and franchisor will decide to part ways. Before this point is reached, every avenue should be explored in seeking healing of the partnership.
Why is it less than ideal for both?
For the franchisor they’ll miss out on additional fees, which includes that monthly royalty fee.
And for the franchisee they’ll be unable to recoup their initial franchising fees. They may also be responsible for a future royalty fee upon termination.
If the franchisor breached the terms of the FTC rule in your agreement, then there may be a legitimate reason to move on.
The Federal Trade Commission website has more information about this scenario. But besides this situation, try to find common ground before finalizing a terminated contract.
As experts in franchise law, we can help you handle the legal aspects of any franchisee issues. We help franchisees evaluate a potential opportunity so they have a full understanding and assurance of the franchise system they join.
By effectively managing risk and maximizing opportunities for businesses we answer the needs of our clients wherever and whenever they arise.
Call Reidel Law Firm today at (832) 510-3292 or fill out our contact form to see how we can help your business franchise.