Avoid Surprises from the Lesser-Known Costs of Franchising
Starting a franchise, similar to running any other type of business, involves an immense amount of preparation to help ensure that there are no surprises along the way. One aspect to remain particularly aware of is the ongoing fees associated with owning a franchise. While you might be familiar with some of the starting costs, such as the initial franchisee fee, several other costs will accrue over time that you will be required to pay. This can include fees that are necessary to get your franchise business up and running, as well as the recurring payments from franchisee to franchisor.
If you are considering franchising as your next career move, we’ve outlined some of the costs you can expect on your journey to avoid unexpected surprises.
Franchise lawyer/personal legal costs
While consulting a franchise lawyer is entirely optional, many prospective franchisees want legal support through the franchise process, especially when reviewing the Franchise Disclosure Document.
There are several valid reasons why someone would want to consult a franchise lawyer, such as if there are franchising terms that are unfamiliar to them. A franchise lawyer’s expertise can also address legal questions and offer legal advice, which cannot always be answered by the franchisor. Of course, this comes with associated fees that you, as the prospective franchisee, will need to budget for.
You might not initially consider travel fees as a cost associated with franchising, but it is important to account for it, especially if traveling long distances is required. Taking part in Discovery Day is a good example of when you may be required to travel, as this usually involves visiting the franchisor’s corporate headquarters and meeting with the support team to ask questions and get a feel for the business (this is typically for qualified prospective franchisees only). If you live quite a distance away from the headquarters, you will need to travel to get there. Purchasing plane tickets or gas money can be an added expense, in addition to dining, hotel fees, etc.
Training is a significant part of franchising, and it is often accounted for within the initial franchise fee. But where is the training conducted? Is there ongoing training after the initial session? Is it close to you or do you need to travel? Since this is a requirement, accounting for the associated fees is important.
Once you have opened the doors to your franchise location, you will likely be required to start paying royalty fees collected by the franchisor. This is a regular, ongoing payment paid on a weekly, monthly, or annual basis and is established by the franchisor based on several different factors.
Royalty fees can be categorized into two types: fixed and percentage. Fixed is a set amount that the franchisee pays the franchisor throughout the duration of the Franchise Agreement. This number does not waiver and is not dependent on your sales. Meanwhile, percentage-based royalty fees can also be categorized into two types – fixed-percentage royalty fees require the franchisee to pay a set percentage of your gross sales, while variable-percentage royalty fees will require the franchisee to pay either a decreasing percentage (a franchisee will pay the franchisor a lower percentage as they acquire more in gross sales) or an increasing percentage (a franchisor faces a higher percentage as they acquire a greater amount in gross sales).
To avoid any surprises, it is important to confirm exactly what type of royalty fee you will pay, when it will need to be paid, and how much it will be.
Interest fees from financing
You may need to consider securing financing for your franchise business if you cannot pay for the investment out of pocket. If you choose the bank loan route, there will likely be associated interest fees that you need to plan for.
If you choose the franchisor financing route, which is not always available for some franchises, there will likely be fees that you will be required to pay. Some franchisors finance part of the start-up costs, while others cover things like equipment or branding. Depending on the franchise, this will vary, but some franchisees may be required to pay interest on sales or will be required to repay once the location is up and running for a certain period of time. These details are entirely dependent on the plan the franchisor has established.
Preparing to pay these additional costs is important to consider when financially planning to invest in this business opportunity.
As a franchise owner, there will be costs associated with sourcing the material and supplies that you need to run your business. For example, if you own a franchise within the food industry, you would be required to purchase food and dining utensils to build your inventory and effectively run the business. When sourcing this material, you will be required to source vendors who sell the material you need.
While there is typically a list of approved vendors that the franchisor will provide you, which will usually help to lower some costs, the costs to purchase said material will not always be a set price as there are factors like inflation that can cause costs to rise. Planning for these cost fluctuations will be essential for success.
Franchising with Dogtopia
While fees are a part of every franchising journey, it is important to find a franchise that offers ongoing support and clarity, as it will make those hidden costs appear much clearer. In turn, this will give you the confidence to plan ahead of time and experience fewer surprises (except for the good ones).
If you are interested in franchising with Dogtopia, check out our Why Dogtopia page, along with our FAQ to help answer some of the common questions we receive. You can also fill out our online inquiry form to receive more information about franchising with us.