Making money as a franchisor: Initial Franchise Fees
This post is the second installment of the post dated March 17, 2015, titled “How Do I Make Money as a Franchisor?”
Most franchisors charge an “Initial Franchise Fee.” The “Initial Franchise Fee” is the up-front fee franchisors charge for the purchase of a franchise.
Franchisors that I represent have charged Initial Franchise Fees that range from a low of $0 to a high of $300,000. Both extremes are unusual:
- The low extreme ($0) is for a franchise that distributes a line of food items at convenience stores and similar outlets. The franchisor makes its money through the sale of food items and ingredients to its franchisees.
- The high extreme ($300,000) was for a franchise for a full-service restaurant with a full bar and live entertainment. The franchise was offered by a celebrity (since deceased) whose name alone commanded the high fee.
Generally, however, the Initial Franchise Fee will range from $20,000 to $75,000. This amount varies depending on factors that include:
- The amount the franchisor must spend to recruit franchisees and grant them their franchises.
- The initial services the franchisor provides to its franchisees. In particular, some franchisors include training costs in the Initial Franchise Fee; others break training fees out separately.
- How much the franchisor must spend to get the franchisee’s outlet open for business. As one example, a franchise for a business that depends heavily on customer traffic (e.g., a restaurant) costs the franchisor more than a franchise for a home-based business, because the former requires the franchisor to incur significant costs for site selection and approval, site development, and other items.
- The franchisee’s total costs of opening its business. An extra $5,000 in the Initial Franchise Fee for a $2.5 million restaurant is a snowflake on top of Mount Everest. An extra $5,000 for a $10,000 outlet (e.g., for the franchise developed inside the convenience store described above) would probably be a deal-breaker.
- What the market will bear. A well-known national brand will usually command a higher Initial Franchise Fee than a start-up.
- The size and makeup of the pool of prospective franchisees. The lower the cost of entry, the larger the pool of prospective franchisees. As a result, some franchisors intentionally charge a below-market Initial Franchise Fee to develop their systems more quickly, then increase the amount as their systems mature.
Is the Initial Franchise Fee a big money maker for franchisors? Rarely. Usually, it covers the franchisor’s costs with a little left over. We will work with you to determine the services you will provide, your goals, and the marketplace, to help ensure that you maximize your returns.