How do you plan for franchise fees?

1 Understand the types of fees

Franchise fees are not all the same. They can be divided into two main categories: initial fees and ongoing fees. Initial fees are the ones you pay when you sign the franchise agreement and start your business. They include the franchise fee, which is a lump sum for joining the franchise network, and any other costs for training, equipment, inventory, and opening assistance. Ongoing fees are the ones you pay regularly throughout the term of your franchise agreement. They include royalties, which are a percentage of your sales or a fixed amount for using the franchisor's system, and any other fees for advertising, technology, support, or renewal.

2 Read the disclosure document

Before you sign a franchise agreement, you should receive a disclosure document from the franchisor. This is a legal document that contains important information about the franchise, including the fees you will have to pay. You should read it carefully and ask questions if anything is unclear. The disclosure document should tell you the amount, frequency, and purpose of each fee, as well as how they are calculated and collected. It should also tell you if there are any additional or optional fees that may apply in certain situations, such as transfers, audits, or terminations.

3 Compare different franchises

Franchise fees can vary significantly from one franchise to another, even within the same industry or category. Therefore, it is wise to compare different franchises and see how their fees affect your potential return on investment. You should look at not only the amount of the fees, but also the value and quality of the services and benefits you receive in exchange. For example, a higher royalty fee may be justified if the franchisor provides more training, marketing, or innovation than a lower-fee franchisor. You should also consider how the fees are structured and how they may change over time.

4 Budget and forecast

Once you have a clear idea of the franchise fees you will have to pay, you should include them in your budget and cash flow forecast. This will help you plan your finances and avoid cash flow problems. You should also monitor your actual performance and compare it with your projections. If there are any discrepancies or changes in your sales, expenses, or fees, you should adjust your budget and forecast accordingly. You should also review your franchise agreement and disclosure document periodically to see if there are any upcoming fee increases or adjustments.

5 Negotiate if possible

Franchise fees 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 fees, such as the amount, duration, or payment terms. For example, you may be able to get a lower initial fee if you agree to a higher royalty fee, or a lower royalty fee if you agree to a longer term. You may also be able to negotiate some discounts or incentives for opening multiple units, meeting certain performance criteria, or renewing your agreement. However, you should always be realistic and respectful when negotiating, and understand that the franchisor has to balance their own interests and costs.

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?