After the franchise business is up and running, there are a number of expenses required for the successful maintaining of the business as well as for being a part of the franchise system. Item 6 of the FDD is where the ongoing costs are listed. Like initial costs they can vary widely depending on the franchisor and the industry the business is in.
Like the franchise fee, the royalty fee is a main differentiator between a franchise and a non-franchise business. Here’s a comparison of royalty percentages across the previously-featured industries:
In addition to the regular fees, there are fees associated with the franchise system that aren’t assessed or collected regularly including:
- Ongoing Training: While initial training is usually covered by the franchise fee, additional training is often an extra cost to the franchisee. Some franchisors do offer additional training regularly, including holding conventions for franchisees, requiring the franchisee to cover travel and living expenses and no part of the actual training. Some franchisors charge for additional training by setting fees per person or for the cost of materials, in addition to travel and living expenses.
- Transaction Fees: Some franchisors change transaction fees on customers’ purchases by debit, credit or gift cards. Fees predominately set according to the fees franchisors’ are charged by the providers of the cards.
- Interest: Paid in instances of overdue payments to the franchisor. Typically, the interest rate is the highest rate allowable by law.
- Audit: The franchisee usually is charged the franchisor’s cost of performing the audit on the business.
- Indemnification: A charge that is levied to the franchisee when a franchisor is sued or held liable for claims arising out of a franchisee’s business. The amount paid varies on the particular circumstances, and is typically the amount needed to reimburse the franchisor.
- Renewal Fee: If the franchisor allows for extension of the franchise terms, a fee similar to the initial franchise fee will be assessed. In most cases, the renewal fee is based off of the terms of the franchisor’s then-current FDD.
Due to the depth and variety of franchise businesses, the given fees illustrated in this article are only the most common and not a complete listing. Additional fees collected by franchisors along with ones that are specific to certain industries such as reservation fees for hotel franchises can be found within the FDDs franchisors are required to make available to prospective franchisees. Please note that there are also ongoing costs not specified in the FDD, but are no less important to the continued operation of the franchise like employee wages.
As you have read, most of the costs of beginning a franchise are similar to beginning a non-franchise business with a few notable differences. Though no business venture can be a guaranteed success, the features given in exchange for the additional costs that come along with investing in a franchise can help bolster an entrepreneur’s chances of creating a successful business.
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