Decoding Franchise Fees: Are You Getting a Good Deal? - Iridium Partners
Decoding Franchise Fees: Are You Getting a Good Deal?
General News

Monday, 3 July 2023

Decoding Franchise Fees: Are You Getting a Good Deal?

Embarking on a franchise journey is an exciting endeavour filled with possibilities, but it also comes with important questions.

One of the main concerns for potential franchisees is understanding the value they receive in exchange for the fees they pay. Are those fees truly worth it? In this post, we break down the components that make up franchise fees and shed light on the value they bring.

So… what are the fees?

The price varies depending on the industry, sector, and specific franchise system. To provide some insight though, we can focus on the typical fees associated with a food and beverage franchise, as they generally fall within a certain range. By exploring where these fees are allocated and what they provide, we can gain a better understanding of their value.

Initial Franchise Grant Fee

The initial franchise grant fee provides franchisees access to and utilisation of intellectual property, including systems, processes, branding, and proprietary products. Typically ranging from $30,000 to $50,000, the fee is influenced by the specific system and the duration of the franchise agreement’s initial term.

In our opinion, even at the higher end, this fee is reasonable and does not fully reflect the collective costs of developing the franchise system. Most systems have invested significantly over several years to reach this point, undergoing rigorous testing, refinement, and the establishment of proven systems and processes. The initial franchise fee is only a fraction of what an individual would need to invest to replicate the same.

Training Fee

Learning the business is a crucial aspect of joining a franchise, and training new franchisees is a core responsibility for franchisors. Sometimes, the training fee or component is included in the initial franchise grant fee, while other times it is separate.

Good franchise systems invest heavily in their training programs, both in terms of system development and personnel. It is rare for the training fee to generate revenue for the franchisor; at best, it helps cover the costs incurred. When a franchisee purchases an existing franchise, they typically pay a training fee to the franchisor. However, it’s important to note that this does not actually increase the number of franchisees or business units.

Ongoing Royalties

For most food and beverage systems, ongoing franchise fees or royalties are calculated as a percentage of revenue or turnover. This percentage varies across different systems, ranging from as low as four per cent to seven per cent, with the majority falling in the middle.

What do franchisees receive in return? The specifics depend on the system but typically include continuous access to system developments, group purchasing benefits that can offset the franchise fees, ongoing support and guidance, and, most importantly, the use of a recognised brand that can significantly boost revenue.

Group Marketing Contributions

Also known as the Ad-fund, this contribution is essential to remember as it is not revenue for the franchisor, nor do they directly benefit from it. The Ad-fund is utilised on behalf of franchisees to increase revenue in their businesses.

The franchisor indirectly benefits from this through the associated increase in revenue, thanks to franchise fees. The percentages allocated to the Ad-fund range from two per cent to around six per cent of revenue. This is favourable considering the general rule of allocating at least five per cent for marketing an independent business. Additionally, individual franchisee units benefit from the collective group spending, enhancing the power of the marketing efforts.

Technology, Systems, and Special Fees

Certain franchise systems may have one-time development fees or special fees designed to cover specific technology, systems, or targeted development programs. These fees typically do not generate revenue for the franchisors but instead offset specific costs within the franchise system for the benefit of the franchisee units.

In many cases, these costs are significantly lower than what an independent business operator would need to pay for similar resources.

While the specific fees vary across industries and franchise systems, it is important to consider the value proposition holistically. Franchise fees often represent a fraction of the expenses required to independently develop a successful business but not all franchises are created the same. By joining a well-developed and supported franchise system with a proven marketing programme, you can gain access to a wealth of knowledge, resources, and cost-saving advantages that can catapult your success.

Remember, with the right franchise, the investment is not just in fees; it’s an investment in a brighter future filled with opportunity, support, and success.