Small Business Concerns: Understanding Franchising Costs

An explanation of franchise fees and costs specifically suited to the concerns of small business owners.

Franchises offer many advantages over a new business. First they offer instant recognition by potential customers. This established sense of quality, service, and variety draws in customers that are already familiar with the company and helps production thrive sooner than if you were starting from scratch. This factor is what draws in many first time business owners to the franchise business opportunity. However, if you decide to open up a franchise there are some fees and expenses that you should be aware of.

The first fee you will encounter is the up-front entry fee or franchise fee. This fee needs to be paid out of existing funds and may not be paid out of money that has been borrowed. This fee is due at the contract signing. The franchise fee only covers the rights to the company name and trademarks. In some cases this fee also covers basic training, manuals, procedures and protocols, and other miscellaneous services. It is important to learn exactly what this fee covers when you are budgeting out your start up fees. In some cases the franchise fee only covers about 5% of the actual start up costs for a franchise business.

In many cases the franchise fee won't cover other of the major start up costs. Additional costs that a franchiser will have to budget for are: real estate, furniture, fixtures, inventory, and uniforms. Some companies, like McDonalds, provide additional services under the franchise fee. In this example they provide intensive training for protocol, procedures, quality, service, inventory control, and hiring and management procedures. While most franchises don't provide real estate, others will supply a building with the understanding that the franchise owner will stay there for a minimum amount of time, usually 20 years, and that they will pay a rent. This rent is based on sales and will run anywhere from 5% of sales to 10% of sales. It is a good idea to ask other franchise owner's what they are paying to make sure that you are not being overcharged.

Royalty fees are also paid on a regular basis and are based on a percentage of sales. This fee is used to pay for on going services provided to the franchise owner and any other support provided by the parent company. These services may include training, trade secrets, marketing strategies, etc"¦When considering a franchise business it is important to keep in mind that you are not really buying the entire business, but instead you are leasing management, marketing secrets, and procedures, along with the trademarked images and name.

The final fee that you will need to be aware of is the advertising fee. All franchise owners are required to pay into this fund. All the money is pooled and goes to pay for national and regional marketing campaigns. Additional funds may be needed in order to promote special events that are unique to your store. However these events will need to be cleared with the parent company before they are run.

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