A franchise enables you, the investor or franchisee, to operate a business. You pay a franchise fee and you get a format or system developed by the company (franchisor), the right to use the franchisor’s name for a specific number of years and assistance. For example, the franchisor may provide you with help in finding a location for your outlet; initial training and an operating manual; and advice on management, marketing or personnel. The franchisor may provide support through periodic newsletters, a toll-free telephone number, a website or scheduled workshops or seminars.
Owning a franchise comes with defined costs, franchisor controls and contractual obligations.
In exchange for the right to use the franchisor’s name and benefit from the franchisor’s assistance,
you will pay some or all of the following:
Initial Franchise Fee and Other Expenses
Your initial franchise fee will typically range from tens of thousands of dollars to several hundred thousand dollars and may be non-refundable. You may face significant costs to rent, build and equip an outlet and to buy initial inventory. You also may have to pay for operating licenses and insurance and a “grand opening” fee to the franchisor to promote your new outlet.
Continuing Royalty Payments
You may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income. Typically, you must pay royalties for the right to use the franchisor’s name, even if you are losing money. You may have to pay royalties for the duration of your franchise agreement even if the franchisor doesn’t provide the services it promised and even if you decide to terminate your franchisee agreement early.
You also may have to contribute to an advertising fund. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your outlet.