Before you buy a franchise, it is important to understand what costs will be associated with starting and maintaining the franchise. The franchise disclosure document (FDD) contains information about what fees you must pay to the franchisor and other third-parties. These should be carefully reviewed so you are prepared with the appropriate financing to keep your business going.
Initial Franchise Fees and Payments
The FDD describes the initial fees that are paid to the franchisor prior to opening the franchise for business. At a minimum, Item 5 of the FDD will identify the Initial Franchise Fee. This amount typically encompasses the franchisor’s costs to help you find and develop a location, launch your business, train your staff, provide marketing assistance, and other items.
Additional payments may be required for inventory, equipment, software technology, training and other fees that you may have to pay to the franchisor or its affiliates. It should be noted that the fees listed in Item 5 do not represent all of the costs of opening your franchise. The FDD will provide more information on the other upfront expenses in Item 7-Estimated Initial Investment.
Item 6 of the FDD describes recurring and other occasional fees you may be required to pay to the franchisor or its affiliates or that the franchisor imposes or collects on behalf of third parties, while you are operating the franchise. These fees may include marketing fees, royalties, ongoing software fees, late fees, renewal fees, transfer fees, etc.
Franchise marketing fees are essentially your share of the franchisor’s advertising of its “brand.” You are benefitting from the franchisor’s efforts and you will be allocated an amount to pay often based on your monthly revenue.
Royalties are paid because you are licensing the rights to use the franchisor’s trademarks, logos, services marks and systems of operation. The amount may be based on a percentage of your revenue, a minimum amount, or the greater of the two. It should be noted that if there is a minimum royalty amount, it must be paid regardless of whether your business is deriving any revenue.
If you are considering buying a franchise, you should seek the assistance of experienced counsel who can advise you about these payments.