How can you budget for franchise fees and royalties in your business plan?

1 Understand the terms

Before you sign any franchise agreement, you should read it carefully and understand the terms and conditions of the franchise fees and royalties. Franchise fees are usually a one-time payment that you make to the franchisor to acquire the rights to use their name, trademarks, and business model. Royalties are recurring payments that you make to the franchisor based on a percentage of your sales or a fixed amount per unit or period. The amount and frequency of the franchise fees and royalties may vary depending on the type, size, and industry of the franchise.

2 Research the market

To budget for franchise fees and royalties, you need to have a realistic estimate of your potential revenue and expenses. You can research the market by looking at the financial performance of similar franchises, talking to existing franchisees, and consulting with industry experts. You should also consider the factors that may affect your sales, such as the location, competition, demand, and seasonality of your franchise. You should also account for the costs of rent, utilities, inventory, labor, marketing, and other operating expenses.

3 Plan for different scenarios

Once you have a projection of your revenue and expenses, you can calculate how much franchise fees and royalties you will have to pay to the franchisor. You should plan for different scenarios, such as best case, worst case, and average case, to see how your cash flow and profitability will be affected by the franchise fees and royalties. You should also factor in any other fees or obligations that the franchisor may impose, such as advertising fees, training fees, renewal fees, or minimum performance standards.

4 Set aside a reserve fund

Franchise fees and royalties can have a significant impact on your cash flow and profitability, especially in the start-up phase or during a downturn. To avoid running into financial trouble, you should set aside a reserve fund that can cover at least six months of your franchise fees and royalties. This will give you some cushion in case your sales are lower than expected or your expenses are higher than anticipated. You should also monitor your cash flow regularly and adjust your budget accordingly.

5 Negotiate with the franchisor

Franchise fees and royalties are not always fixed or non-negotiable. Depending on the franchisor and the market conditions, you may be able to negotiate some aspects of the franchise fees and royalties, such as the amount, frequency, duration, or method of payment. You may also be able to get some discounts, waivers, or incentives from the franchisor if you meet certain criteria, such as opening multiple units, achieving high sales, or referring new franchisees. However, you should be careful not to compromise the quality or consistency of the franchise system or brand.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?