The initial franchise fee
The initial fee is a one-time payment for the right to use the brand, systems and training. It is paid before you open.
It varies widely by brand and industry. A small service concept costs far less than a full-service restaurant or a hotel. The fee typically covers the license, initial training and opening support, but not your build-out, equipment or inventory.
Do not assume you can negotiate it. Some franchisors offer discounts for veterans or multi-unit commitments, so ask.
Royalty fees
Royalties are ongoing payments, usually a percentage of gross sales, sometimes a flat monthly amount.
Because royalties are usually based on gross sales, you owe them even in a month when you lose money. Include them in your break-even math. In this illustrative example, a 6 percent royalty on $50,000 of monthly sales is $3,000 each month before you pay rent, labor or cost of goods.
Work out your numbers with the break-even point formula.
Marketing and technology fees
Most systems charge a fee to a national or regional advertising fund, plus technology, software or point-of-sale fees.
The ad fund fee is typically a percentage of sales. You may also need to spend on local marketing yourself. Technology fees can be monthly. Ask what exactly each fee buys and how the fund is spent.
Other costs beyond the franchise fees
Build-out, equipment, inventory, signage, insurance, licenses, deposits and working capital often cost more than the fee itself.
- Leasehold improvements and construction
- Equipment and furniture
- Opening inventory
- Grand opening marketing
- Professional fees for legal and accounting review
- Working capital for the first months before sales stabilize
Item 7 of the disclosure document lists an estimated initial investment range. Use it as a planning floor, not a ceiling. See business startup costs.
Where to find the real numbers
Every franchisor must provide a Franchise Disclosure Document (FDD). Item 5 covers initial fees, Item 6 other fees and Item 7 the estimated initial investment.
The FDD must be given to you before you sign or pay. Read it with a franchise attorney. Item 19, if provided, may contain financial performance data, but not all franchisors include it. Speak with current and former franchisees listed in the document.
For the overall process, read how to become a franchise owner and buying an existing franchise.
Questions to ask before you commit
Ask about total first-year costs, royalty basis, territory protection, renewal fees, transfer fees and what happens if you leave.
- What is the total estimated investment, not just the franchise fee?
- What are the royalty and ad fund rates, and do they rise over time?
- Is my territory protected?
- What are the renewal and transfer fees?
- What are the franchisor's required suppliers and are their prices competitive?
- How many franchisees have left, and why?
Call franchisees on the FDD list and ask what they earn compared with what the brand claims.
Paying for a franchise
Most buyers combine personal savings with financing. Terms depend on the brand, your credit and your experience.
ROI Funder does not place startup loans for businesses under 6 months or acquisition loans, so it is not the right fit for the initial franchise purchase of a business that has not yet opened. Once a franchise location has operated 6+ months with $20,000+ monthly revenue and the owner has 500+ FICO, equipment financing, working capital or a line of credit can help with later growth. Learn more in how to get a loan for your franchise.
Frequently asked questions
What is the average franchise fee?
It varies too much by brand to give one useful number. Check Item 5 of each franchisor's disclosure document.
Are royalties charged on profit or sales?
Usually on gross sales, which means you pay even if the location is not profitable.
Can franchise fees be negotiated?
Sometimes, such as multi-unit or veteran discounts. Ask the franchisor directly.
Should I hire an attorney?
Yes. A franchise attorney can review the FDD and franchise agreement before you sign.