There are quite a few payments that franchisees must pay. There are on-time and ongoing payments. The FDC requires franchisors to list the fees that are required of the franchisee. These fees are usually located in the UFOC.
First, you will pay the initial franchise fee. This fee is required for a franchisee to have the rights to use the franchise trademark and sell its products and/or services. The franchisor has established a system that has been proved to work in the past and brand awareness. In return, the franchisors request a franchise fee, which can be under $10,000 or up to $100,000.
Legal and accounting fees are also required. An accountant helps look over the franchisor’s financial statements and evaluates if they are financially stable. An attorney looks over your franchise agreement and creates a corporation, LLC, or legal entity for your franchise, if needed.
As a franchisee you will also need to pay for insurance. There are a few types of insurance you’ll probably need. You’ll need property, liability, and may need to provide health insurance for your employees. The franchisor will have specific requirements. I would make a copy of the requirements and fax it to the insurance company to make sure that you get every requirement and get a quote.
Employee’s salary is another payment you have to think about. In the first two years of franchising, you may not make a profit. So, you need to calculate the employee’s salary in your initial budget.
You will also need to factor in building/outfitting costs. This cost varies widely on the type of business you are running. If you have to build a store from the ground up, the costs are going to be much more. However, if you are outfitting a building that already exists they will be less. The things that come with these costs would be décor, lighting, ventilation, equipment, furniture, and so forth.
You will need to pay rent and security deposits. This money goes to your landlord if you lease your building.
You need to pay for equipment and software upgrades. The franchisors may require these upgrades.
You will also have to pay royalty fees. These are usually paid monthly by the franchisee to the franchisor. It is usually a percentage of the franchisee’s total sales. These fees are usually between 4% and 8% of the total sales.
Most franchisors require that the franchisee pays advertising fees. The fees go to the advertising fund which pays for national and/or local ad campaigns, commercials, and other promotions. Other franchisors may have co-op programs where the franchisor will pay a portion of the advertising and the franchisee will pay the rest.
Those are the fees. It may seem overwhelming but just take them one at a time.