What are common franchise fees, and what are not? Find out what to expect as a new franchise owner and the red flags to avoid.
So, how does a franchise work? The tried-and-true mantra of franchising is, “Franchising allows you to be in business for yourself, but not by yourself.” Investing in a franchise gives you access to a turnkey model with a history of success. To gain access to an established brand, training, and support, franchise owners pay upfront and ongoing franchise fees.
Every franchisor files a Franchise Disclosure Document, or FDD, with the Federal Trade Commission. The FDD outlines the franchise agreement, including initial investment and ongoing fees. To understand what to expect, let’s review some common franchise fees you’ll likely encounter as you do your research.
- Initial franchise fee: As part of the franchise agreement, you’ll likely need to pay an initial franchise fee. By paying this fee, you gain the right to use the brand’s trademarks, products, and proprietary systems. The FTC requires a franchise fee to be at least $500, but the average franchise fee for a single-unit deal generally ranges from $20,000 to $50,000, according to the U.S. Small Business Administration.
The initial franchise fee is non-negotiable, but some brands offer discounts to qualified applicants, such as veterans or entrepreneurs within minority groups. Buying the rights to multiple locations in a multi-unit development deal typically reduces the individual unit franchise fee but is more expensive overall.
Franchisors do not make a profit from the initial franchise fee. The fee is used to market to prospective entrepreneurs. It facilitates training, franchise onboarding, opening support, and paying its franchise sales team.
- Royalty fee: Franchisees pay ongoing royalty fees. All franchises charge a royalty fee, but the exact amount depends on the brand. Prospective entrepreneurs need to understand how the royalty fee is calculated for the business they are considering. The royalty fee can be a percentage of sales or a fixed rate contingent on the guidelines laid out in the brand’s FDD. Often, the royalty fee can also be a percentage of gross profits or net profits. A flat royalty fee is a fixed cost that needs to be paid even if your franchise location is not hitting its sales goals.
The average royalty fee for most franchises is around 6%, according to FRANData. Business-related franchises have the highest average royalty fee at 10%. Lodging, restaurants, and retail franchises charge the least, at 5%.
It’s a good idea to speak to other franchisees during validation to get their insight on the brand’s royalty fee. Failing to pay a royalty fee can result in stiff penalties from the franchisor.
- Advertising fee: One of the perks of franchising is having national and local marketing guidance and support. Franchise owners pool their advertising dollars to maximize reach. Owners are required to pay a fee to cover advertising costs. The fee can be a fixed dollar amount, but typically it’s a small percentage of sales.
As you conduct your due diligence, look for red flags that may indicate trouble down the road. Beware of franchisors whose sales pitch offers to reduce royalties by charging high upfront costs. A good franchisor does not profit from your initial investment. The bulk of their profits should come from royalty fees and long-term earnings, not a one-time cash infusion. Similarly, if an established franchise is offering a discount on fees, it can be a sign they’re in financial trouble. The FDD provides a synopsis of pending litigation against the franchisor. If the list is long, that can indicate if there’s flaws in the business model or if the brand has unhappy franchisees.
When you spot a red flag, the best way to find answers is to speak to existing franchisees. They will be able to offer information about their relationship with the franchisor.
Success Runs in the Family at Moran
Moran Family of Brands is a family-owned business with a long automotive and window tinting industry history. The company franchises six brands, including Milex Complete Auto Care, Mr. Transmission, and Turbo Tint. All our locations are locally owned and operated, and we strive to help our franchisees succeed and make a difference in their communities. We help our franchise owners create legacies for their families. Many of our current owners grew up in the business and took over operations when their parents retired.
There are no surprise fees at Moran. Our goal is to create a strong and growing franchise system by helping people achieve their dream of business ownership. The startup costs to launch a Mr. Transmission or Milex location are $208,613 to $265,873, including an initial franchise fee of $40,000. Franchisees need to allocate 1% of gross sales to a marketing fund and pay a weekly royalty fee of 7% of gross sales. To help build a loyal customer base, we also require our owners to conduct local marketing.
To learn more about investing in an automotive franchise or common franchise fees, request information to connect with someone from our team.