Franchise Fee Explained: What You Need to Know Before Investing

Introduction

Have you ever seen a franchise fee that’s just so high that it’s hard to justify why it might be worth pursuing? In today’s video, we’ll discuss when a franchise fee is too high and when you should consider other franchises or even starting your own independent business in the same industry.

High Franchise Fee

Chick-fil-A Example

Some major brands offer franchise fees that are not high. For instance, Chick-fil-A charges only $10,000 as an investment for operators. Though you don’t own the business, you can make around $200,000 to $400,000 annually by operating a Chick-fil-A restaurant. However, you’re capped at operating a maximum of two locations, and there is no capital gain since you cannot sell the business.

Justifying High Franchise Fees

There are some franchises that charge $60,000 for a single unit. While this may provide marketing and support, it’s important to ensure that the value justifies the cost. Over a 10-year period, including royalties, a high franchise fee must make financial sense. Comparing it to other brands in the same industry or starting an independent business might reveal better alternatives.

Franchise fees over $30,000 or $40,000 can be considered high. If a franchise fee is $50,000 or $60,000, it’s crucial to evaluate whether:

• The potential revenues are significantly higher than those of competitors.
• It’s easier to open and manage compared to other options.
• The resale value is higher, considering the transfer fee

Transfer Fee Considerations

The franchise transfer fee is an important aspect when selling the business. This fee can be a portion of the original franchise fee or the entire fee. High transfer fees may be a disadvantage when selling the franchise, as buyers compare prices with other options in the market.

It’s Fine Paying a Huge Fee

High franchise fees may be justified for large international developers, like those opening McDonald’s or Burger King locations. These fees can be hundreds of thousands of dollars, but the opportunity is large, potentially leading to a $50 million or $100 million business.

Conclusion

Before committing to a high franchise fee, do your research. Consult existing franchisees and the franchisor to understand the potential financial return from the franchise. If the numbers don’t add up, it may be best to look for a better opportunity.