Franchise Fees: What It Really Costs to Own a Franchise

Posted on May 1, 2024 in Blog

Franchises offer an accessible and supportive business model that has helped hundreds of thousands of entrepreneurs become small business owners. While not insignificant, typical franchise fees match the value you receive by joining a franchise system.

Read on to learn more about the initial and long-term franchise fee structure and the various costs associated with operating a franchise.

First, What Is a Franchise Fee?

Franchise fees usually refer to the initial one-time “license” fee. Franchises charge a relatively fixed upfront fee to use the organization’s resources to open a new location.

The cost to operate a franchise varies, but the fees are often used by the national organization to get the new location up and running with tools and services including:

Access to the franchise’s business software and website
National marketing support
Digital assets and branding materials
Training and recruiting support

It’s worth noting that the franchise license fee won’t cover all your startup expenses; the license fee is in addition to your initial investment. The franchise disclosure document (FDD) clarifies all expected costs.

How Much Is the Average Initial Franchise Fee?

The average franchise fee ranges from $25,000 to $50,000, with plenty of franchises charging $100,000 or more. Many franchisors also expect you to have capital assets worth $250,000 or more to qualify as a franchise owner; you won’t have to pay that much, but they want to know you have pockets deep enough to make a real go of it with your new venture.

How Are Franchise Fees Calculated?

Franchisors base initial franchise fees on the value derived from leveraging brand name, assets, training materials and marketing. Nationally and globally recognized franchise brands like Starbucks have incredible brand loyalty, plus a comprehensive network of tools that ensure success, such as mobile apps, employee benefit programs and an exceptionally effective marketing department.

Smaller franchise companies may cost less because they lack these resources, although younger brands offer considerable growth potential for motivated franchisees to shape.

Ongoing Expenses for Owning a Franchise

The term “franchise fees” may also describe a range of additional monthly, quarterly or annual fees charged by franchisors. While initial franchise fees are a one-time payment, these recurring fees cover ongoing franchisor costs.

More Cash, More Splash: The Royalty Fee

These recurring fees go by many names. You might see them referred to as marketing, technology or branding fees in your franchise agreement. The most common moniker is “franchise royalty fee,” sometimes called a licensing fee.

Franchise royalties are paid in several ways.

In some cases, new franchisees may pay a lower rate or amount for their first year or two, giving them time to grow and pay down debt associated with starting their business.

Depending on the franchise, royalties are structured in one of a few ways, including:

A fixed fee, usually paid upfront and annually
A percentage of total weekly, monthly or quarterly revenue
A share of specific product sales
A percentage of the total actualized profit

What Is the Average Franchise Royalty Fee?

Most royalty fees are based on a percentage of revenue, usually between 4% and 12%. Franchisors often increase the percentage based on the age of the franchise location, with more established businesses paying near the top end of the scale. During economic downturns, franchisors may relax or adjust these fees on a case-by-case basis.

Royalty fees cover day-to-day corporate operations, including hiring franchise marketing experts, business administration, strategic initiatives and partnerships, and training programs. Franchise agreements clearly define how all fees are used at the enterprise level, so read the agreement carefully.

Elevate Your Marketing with the Franchise Industry Experts

Franchising is a great way to scale a local business or make waves worldwide. For over 25 years, Oneupweb has worked with franchise brands and individual owner-operators to solve complex marketing challenges. See how we can help; get in touch or call 231-922-9977 today to get started!