List of Franchise Fees - Learn About License Fees, Royalty Fees & More!
A lot of perspective franchise owners aren't fully aware of the types of franchise fees that they may be agreeing to when entering into a franchise contract. Or, they may not understand how the hidden costs that occur with owning a franchise can really add up. Franchise companies, or franchisors, know that it's important to sell you a good money making business plan; they know that fees aren‘t a great marketing topic, so they‘re not commonly discussed. Make sure to read this guide for some common franchise fees that you should research and certainly inquire about before signing a contract as a franchisee.
List of Franchise Fees:
- Initial License Fees
- Royalty Fees
- Assessment Fees
- Lease Fees
Meet Joe Schmoe - A Potential Franchise Owner
To give readers an idea of how quickly fees can add up, we’ll use Joe Schmoe as an example. Joe just read an article in a business opportunities magazine that he simply can’t pass up. He impulsively calls the 800 number and asks for an information from a franchise opportunity called “Ice Ground Transports, Inc.” (Note: Fictitious) The company sells dry ice and Joe really thinks that he can move his franchise into very profitable territory. He lives in Alaska, but Joe suspects that even Eskimos will have use for dry ice! IGT offers to rush-delivery the information packet, and Joe gladly accepts. Joe fills out his financial history and employment history and faxes the agreement to IGT. What a deal - a dry ice delivery truck franchise for just $9999!
Two days later, Joe receives a fax with a contract that he’ll have to sign and send back in order to become an official franchisee. Joe takes some savings out of his retirement, writes a check for $9999, quickly signs the contract, mails it via certified mail and sits back and waits. Joe didn’t even bother to take his attorney friend to lunch and have him look over the contract. Silly Joe!
Franchise Assessment Fees
Assessment Fees - An assessment fee is typically said to cover advertising and promotion costs for the franchisor company. Depending on the size of the franchise, you may be billed a flat fee or fee based upon your sales revenue. For larger franchises, these are typically billed annually, but they do occur monthly, as well.
Franchise Lease Fees
Lease Fees - A lease fee works as payment for any property leased from the franchisor. This could be equipment (ice trucks and dry ice containers, in Joe’s case), land, property, etc. Lease fees vary in all franchise contracts, but similar to assessment fees, you can expect either a monthly or annual flat rate, or a rate based upon a percentage of revenue for the month or year.
Initial License Fees
An Initial License Fee is one of the most common types of franchise fees. It means that you’ll have to make an upfront payment simply for being able to use a franchise.
3 days later, Joe receives a telephone call from the company asking where his initial license fee was. It’s not included in the $9999 and they’ll need an additional $499 before they can process his franchise agreement paperwork. Joe feels silly, oops - he should’ve known. Of course he has to pay a fee to use a company’s name, logo, etc. Unfortunately for Joe, he hasn’t done his research or read his contract and he’s unaware that the $499 initial licensing fee for his new franchise doesn’t cover trademark use. That’s ok, he’ll find out next month!
Franchise Royalty Fees
Royalty fees are also very common types of franchise fees. These fees are typically paid on a monthly basis, sometimes quarterly. A royalty fee allows franchisees to use franchise trademarks, product names, logos, etc. For example, A royalty fee is what allows Subway owners to use the name Subway as well as the names of their famous sandwiches.
Let's check back with Joe-
It’s the end of Joe’s first month as an official franchisee for Ice Ground Transports, Inc. He’s been working real hard, attempting to sell dry ice to Eskimos and he has even managed to get a few accounts. He sends in his monthly revenue report to IGT and promptly receives an invoice for a royalty fee and two other fees.
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Don't Be Like Joe - Understand Franchise Fees
Poor Joe. He’s done calculations and finally pulled out a copy of his contract to let his attorney look at. It appears that Joe was sadly mistaken and that $9999 was just a start up fee. Now he’s out $499 for an initial license fee, 5% of his monthly revenue for royalty fees, $50 a month for a promotional assessment fee and $250 a month for his franchise lease fees. Surprisingly enough, there isn't as high a demand for dry ice in Alaska as Joe had originally thought. Luckily, Joe only sign a 12 month franchise contract with IGT. He'll eat his losses and move on another business opportunity!
Lesson Learned: Make sure to carefully review the fees associated with your franchise contract. Ask questions. Demand a list of fees that you’ll have to pay (upfront and monthly or annually). As always, if you should have any legal questions, make sure to contact your attorney.
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