When weighing the pros and cons of purchasing an independent business vs. a franchise ­– or comparing different franchising opportunities – you’ll want to consider the various fees and royalties involved in purchasing and operating a franchise.

In franchising, the costs can vary widely between industries (e.g., quick-serve restaurants, pest control services, home repairs, etc.) and the various organizations within the segment or segments you’re evaluating. Here are definitions and insights on various expenses are assessed:

  • Franchise fee: This is a one-time, up-front expense. You’ll pay it in order to use the franchisor’s brand name and operating system. It also applies to their training, support programs and more.

In their article, The Costs Involved in Opening A Franchise, Franchising.com notes that franchise fees generally run in the $20,000 to $30,000 range. Be prepared to shell out upwards of $100,000 or more for well-established brands with substantial earnings potential. At the lower end, home-based businesses often pay franchise fees of less than $20,000.

Some franchising networks include in the franchise fee (or call out, as a separate line item) an upfront marketing fee or “kick-starter.” Often covering a year’s worth of local marketing expenses, it’s intended to drive as much business to the new operation as soon as possible. The fee may be applied to a grand opening, pay-per-click (PPC) advertising, search engine optimization (SEO) for the local franchise’s own website, or other marketing efforts of direct benefit such as driving new sales leads or building on existing business.

  • Royalties: There’s an ongoing cost for using the franchisor’s brand name, operating their system and enjoying their support programs, and it’s called a royalty. Paid throughout the life of your franchise agreement, royalty payments can be calculated in several ways. In most franchising networks, the fee is a percentage of either the franchisee’s gross or net revenue.

In their blog, Franchise Fees: Why Do You Pay Them And How Much Are They?, the U.S. Small Business Administration (SBA) observes that royalties range from 4% of your revenue all the way up to 12% or more. Generally speaking, high-volume businesses (e.g., fast-food franchises) pay a lower percentage.

  • Marketing fees: One benefit to owning and operating a franchise is the brand recognition your business will receive as part of a nationally advertised organization. A franchisor often spends big each year to market their brand, and you’ll be asked to do your share. Like royalties, these expenses are usually based on your monthly revenue.

How much will you expect to pay in marketing fees? Franchising.com notes that 2% to 4% is common. However, one industry expert reports the marketing fee can be as low as 1%. Will it be money well spent? Ask your (potential) fellow franchisees. When conducting your due diligence prior to a purchase, quiz franchise owners if they believe their monthly investment is worth it. Check with the franchising organization, too. For example, does their national website generate good-quality sales leads for their local franchises to pursue?

Where can you find out about franchising expenses?

Fees and royalties should always enter your calculations of franchise ownership and never come as a surprise

Most expenses are well publicized in the promotional materials and on the websites of franchisors. What’s more, many costs are required by law to be listed in the Franchise Disclosure Document.

A parting comment.

Allegra welcomes your questions about fees and royalties. Ask us about them and any other concerns that come to mind when exploring your franchise ownership opportunities in the graphics communications industry.