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When you join a franchise, you are expected to make certain and specific payments to your franchisor. These fall into two categories: franchise fees and royalty payments. Every franchise requires that its franchisees make these payments, but the amounts, payment schedule and benefits vary by franchise. To make sure you aren't taken by surprise, it is essential that you understand exactly what you will need to pay prior to joining a franchise.
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Franchise fees
Franchise fees are paid when you join a franchise. They can be thought of as payments for being allowed to join the brand. This fee varies by brand, with large, well-known and long-established brands often charging more than smaller brands that want to raise their profile and encourage new franchisees.
The franchise fee covers the cost of franchisee recruitment, franchise development, site identification and training. It also compensates the franchisor for their time in getting the new franchisee established, providing them with the tools, products, marketing material and support that they require to get their new business off the ground.
Franchise fees may be paid in full up front or through a deposit, with the remaining balance payable upon signing the franchise agreement.
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Royalty payments
Royalty payments are charged to franchisees for the use of the franchisor's intellectual property, which includes their brand name, logo, marketing material and stock. The franchisor tends to view this fee as covering the running costs of supporting each franchisee. This fee can be charged as a percentage of turnover or profit or as a fixed fee, and it may be charged weekly, monthly, quarterly or annually depending on the preferences of the franchisor.
Percentage of turnover/profit: The percentage value will be detailed in the franchise agreement, as will an explanation of how it will be calculated and paid. Franchisors tend to favor this arrangement because they can make more money from successful businesses, although franchisees may wish for an upper cap to be established to incentivize them to pursue greater profits without having to pay excessive royalty fees.
Fixed fees: Fixed-fee arrangements involve paying the franchisor a flat fee regardless of their actual turnover or profitability. This arrangement is often favored by small franchises because it minimizes the administration burden and provides clarity for a franchisee's financial forecasting.
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Alternative to royalty fees
Some franchises do not charge a royalty fee and instead make their money through a markup on the products and services they supply to their franchisees.
In conclusion, it is essential that prospective franchisees investigate the costs they will bear as a result of buying into their chosen franchise brand, and raise any questions with the franchisor or a franchise attorney or accountant prior to joining. Once the franchise agreement is signed, they will be bound by its terms and conditions, even if it turns out that they did not understand them.
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