alrighty! now we know what franchising is and how it works (if you missed this go back to read part 1: what is franchising? (the relationship, legal stuff + the most important clause in franchise law) let’s move on to the first of the 3 standard franchising fees you can expect to pay when you become part of a franchise system.
as i said mentioned in my part 1 post, franchising is a very standardized industry due to the fact it’s governed by franchise law and we’re all working off the same document.
in franchising, you pay three standard fees.
1. the initial fee
2. the royalty fee
3. the ad fund or brand fun fee
(note, there might be more fees that franchise system you’re interested in require, and those will be listed in the disclosure doc, but these three are the for sures you’ll have…)
i’ll deep dive ’em all. first, up…
standard franchising fee #1 – the initial fee
the initial fee is a one time fee paid at the time of signing your agreement. there’s a range in the market of what that initial fee is dependant on the type of franchise and how complex or simple the system is – but most initial fees are around $50k (that’s what ours is too).
the initial fee pays for a lot. it basically is the thing that gets you from knowing zero about the business and industry to getting you fully training on all the nuances of the new business model you just bought including (but not limited to):
x. financing, realestate, construction + build out support.
a franchisor will (or should) be giving you guidance on everything mentioned above. their goal is to get you open in the perfect spot, on time and on budget – so you can expect a massive amount of support in finding you space, getting the best rental rates, getting you some tenant inducements (fancy word for getting your landlord to pay for the upgrades to their space you require), layouts, drawings, assistance with finding a contractor to build out your space (some models will build out your space entirely for you), project management support / coordination, initial orders to outfit your build with all the supplies, fixtures and equipment you need. not all of this is covered in the initial fee, there may be things that require third parties support or other charges that go outside of the scope of the initial fee- but all this info, specs, manuals and guidance are what you pay for and best yet you don’t have to come up with yourself.
x. the marketing / grand opening / sales ramp up programs:
a great franchise system should have all this on lock down and should provide you with a full blown plan to get butts in seats fast. it’s usually at least a 90 day pre-opening plan – a full grand opening plan and then another 90 day post open plan. after that you’ll usually fall into the cadence of normal marketing plans that the brand runs for all other operational location in the system. note, it’s the strategy, planning and location market targeting support that you’ll get included in the initial fee. actual marketing spend to cover costs of the program will be part of your initial investment changes (covered below). but again, the main win here is that you’re given the playbook on everything marketing that works for your budding new biz.
you of course get all collateral for your business location. you pay for the hard materials – but all of the creation of everything from signage, to service menus, to business cards, to promotion materials, even staff room signage is done! you need to do nothing on this end. you’re location will also get onboarded around all the digital properties the brand owns; the website, social media accounts, newsletters. all this is usually included and you don’t pay extra for.
x. all the staffing stuff you need to know:
how to attract, train and retain your employees. how many people to hire, how to hire them, how to set initial schedules, plus you’ll be taught all ongoing staff management, engagement, culture and core values elements of the brand (we’re really big on this stuff…)
x. financial literacy, profit maximizing techniques + account set ups
a great brand will give lots of support around financials and profit maximization strategies related to your industry and business. you should also get help with account set ups from accounting software, insurance + benefits providers, to all account set ups you’ll need to run your business (phone, internet, merchant terminals, security system, and any software related to your new industry
x. all of the operational policies, procedures and protocols of the business;
from how to answer phones, to run payroll, manage inventory, guest acquisition and customer service care guidelines, and of course how to deliver your product or services – for us that’s full details on every single step of all our beauty bar services – for other concepts that might be how to bake all your breads, croissants and muffins or how to administer home care to the elderly or provide child care to kiddies. this is really the bulk of what your buying. the secret sauce of what the original concept created – and now is replicating through your location , store or in our case beauty bar. it’s a lot. and all that training and the human beings delivering this training to you is usually covered in that initial fee.
on the franchisor side, this fee goes towards all those payroll costs for all of the people involved in this training + set up for you. it also covers the legal fees incurred on the franchisors end of getting the deal done – plus any commissions owed to sale staff or brokers fees if the candidate used a consultant to help find a brand they love and want to get into business with (i’ll cover what brokers are in another post – but that can eat up 40% to 60% of an initial fee).
when all said and done, the initial fee doesn’t really net the franchisor much profit, if at all. it’s a bit of a sunk cost in order to get a new location off the ground. it certainly doesn’t cover the infrastructure costs involved in growing and maintaining a franchise system – so that why every franchised business also charges a royalty fee….
to learn all about royalty fees click the next post in our franchising 101 series / part 3: standard franchising fees – #2 the royalty fee.
if you’re interested in finding out more – join one of my webinars (link on the right) or…
note: all of this information was current as of today’s date, june 4th, 2021. it in no way may be valid or true beyond today’s date. i’m obviously not a lawyer and so none of this should be taken as legal advice. it’s just anecdotal info that’s i’ve gleaned from my years as a franchisor and was current info about my system at the time of writing this. stuff might be changed and so any current information about THE TEN SPOT® franchising system should be taken from our disclosure documents, franchise agreement, operational manuals and guides. amen!