How To Price a Franchise, Including Franchise Fees

Selling franchises can build a brand up to global dominance, validate a business concept and set up recurring royalty payments for life, but how does an entrepreneur know how to price their business?

Any entrepreneur selling franchises should consult a franchise attorney to help craft a Franchise Disclosure Document and make sure that any agreements the franchisor enter into are legally binding and above-board. But according to Mark Siebert, founder of the iFranchiseGroup and an accomplished author on franchising, attorneys can only give you part of the picture. 

According to Siebert, pricing a franchise and its fees represents a major stumbling block for budding entrepreneurs. Here’s how to nail the pricing of your franchise.

How To Think About Royalty Payments

“The attorney’s role is to document a franchise program,” said Siebert. “The attorney’s role is not to say, ‘Your franchise should be at a five or six percent royalty payment. They can only tell you what they’ve seen other franchises do. They’re not crunching the numbers.”

To get the right royalty payment, an entrepreneur needs to take a long view of the situation. Unfortunately, according to Siebert, many franchisors simply try to match or undercut their competition without considering what royalty fee makes sense for their system. 

“If you’re off by one percent on your royalty, it could easily become a $10 million mistake,” said Siebert. “In franchising, if you’re off by one percent on $500,000 in sales, that’s a $5,000 mistake. If you sell 100 franchise units, that’s a half-a-million-dollar mistake. Over 100 franchises with a 10-year contract term, that’s a $10 million dollar mistake.”

The goal of any franchise system is for the franchisor to become “royalty self-sufficient,” meaning royalties pay for the entire operation of the franchisor.

Instead of pricing a royalty to beat competitors, think instead of how many franchise sales are needed to become royalty self-sufficient and when you could achieve that level. 

Learn the Industry Norms

Each industry has different norms for pricing. A fast-food restaurant sells many units, so royalties in that industry tend to be smaller, more frequent payments. A contracting business that takes on large jobs tends to have a higher royalty percentage on fewer transactions. 

Additionally, consider your target markets. Jack Armstrong, the New Jersey president of FranNet, a franchise consulting firm, said that real estate considerations weigh heavily on cost structures in franchise deals. 

“If you’re looking at food, retail or automotive, it all depends on real estate,” said Armstrong. “It depends on where you look in the country. In New Jersey, real estate is expensive, so we see more service-based industries with a small real estate footprint. With retail space-heavy brands, the outside costs like real estate outweigh the franchise fees.”

Franchise Fees Raise The Bar

According to Armstrong, franchise fees usually fit within the $20,000–$50,000 range. This one-time fee represents the cost of admission for franchisees, and it’s intentionally kept high. Franchisors hope to attract franchisees who are good with money, have liquid assets and know how to invest. Without a high franchise fee, any unserious entrepreneur could waste a brand’s time and tarnish its reputation. 

“Franchise fees are generally $20,000–$50,000. There’s not a lot of swing there,” said Armstrong. “If you’re spending $100,000 on leases and another $100,000 on equipment, franchise fees become a small part of the equation. The big question that remains is the royalty and what are you getting for it.”

Name Your Price, But Back It Up

Ultimately, franchisors set their franchise fees and royalties at levels they think their target buyers can afford with financing. Franchisors that provide better brand recognition, support and service will charge more than franchisors that have minimal presence. 

Unlike franchise fees, royalty fees are ongoing. Franchisors often also charge marketing fees based on a location’s revenue. In all cases, Armstrong and Siebert were unanimous: Franchisees want to see a detailed breakdown of where their money goes.

For any fee, give franchisees a detailed breakdown of where that money is being allocated. If a franchisee has to pay $1,500 a month in marketing fees, give them an itemized list of marketing expenses and a breakdown of how they grew the business.

By being detailed and thorough, a franchisor can think less about trying to undercut competition’s prices and shift the conversation more towards what their corporate office will do for franchisees.