What Is a Franchise Fee?

A franchise fee is, most often, a one-time payment that a franchisor collects from a franchisee. These fees are often one of the final steps toward investing into a franchise brand – and they are often the final turning point for franchisors to hand over a franchise to a prospective franchisee.

Investing comes at a price, of course — and a franchisor handing over a game plan comes at a price, too. These fees are normally implemented as a way to buy into a brand, or a means to quite literally ‘buy’ into the expertise of an existing brand.

Franchise fees are in place to ensure franchisees are committed to investing into a particular brand rather than investing into the mere concept of business ownership. Opening an independent business does not come with franchise fees, of course, but committing oneself to the franchising industry gives owners a roadmap for business success under a proven model.

For many, this is where franchising fees have been heavily justified. Franchising fees allow franchisors to instantly recognize how serious a potential investor is, which ensures all prospective business owners are on a path toward sustainable ownership.

Franchising fees are different from royalty fees in that franchising fees are collected before going into formalized business. Royalty fees are collected over time, often based on a cut of how well some units have performed, while franchising fees are essentially in place to confirm the ‘seriousness’ of a particular franchisee upon opening.

These payments and values are always disclosed up front on a Franchise Disclosure Document. This means that investors don’t need to be deceived by brands when it comes to a final figure, and they can be well aware of the programs and systems they are buying into.