Franchise Fees – What Are the Real Costs?
"Franchise is pure exploitation – the fees are way too high."
Many similar rumours are circulating, and perhaps you have heard some of them yourself. What many people do not know, or simply overlook, is this:
- The costs are variable.
- The value provided by the franchisor in return is incredibly valuable.
Franchise Start-Up vs. Independent Business Start-Up
Let us begin with the advantages of founding a franchise compared to starting an independent business. In the franchise sector, you launch with a proven concept and an established brand behind you.
This means for you: Starting your own business is many times easier thanks to franchising.
With a traditional business start-up, significant costs arise right from the outset. Think of product development, IT costs, contracts that need to be drafted by lawyers, and much more. These aspects alone represent a very substantial cost factor in most cases.
On the other side, of course, stands success. When starting a business without a franchise, there are significantly more uncertainties. You don't know whether your product or service is market-ready or will gain traction. You have no proven sales or pricing strategy, and no clear plan for when the break-even point will be reached.
In franchising, this experience already exists. The brand and product are established in the market, and there are clear structures and processes across all business areas that franchisees follow. The investment and risk are manageable, and there is a plan in place for reaching the break-even point.
In short: the simplified start is financed by the franchise fee.
1. The Entry Fee
The simplified start is made possible by the entry fee. This is paid to the franchisor at the beginning of a franchise venture to cover the services provided by the franchise headquarters.
This includes:
- Development and provision of corporate identity and corporate design
- Provision of inventory and operating resources
- Involvement in the set-up and planning of the business
- Location consulting and associated territorial protection
- Years of in-depth, specialist expertise
- Organisation of basic training sessions
- Creation of manuals
- Testing in pilot businesses
- Development costs
- Usage rights
On average, this one-time entry fee amounts to approximately €15,000.
This amount varies considerably from system to system. There are franchise systems that waive the entry fee entirely, while others charge an entry fee of several hundred thousand euros.
Take a moment to look back at all the points listed above that are covered by this fee. Suddenly, the rumours about franchise fees don't seem quite so alarming after all.
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2. The Ongoing Franchise Fees
Once you have launched your business, the support from the franchise headquarters is far from over. Ongoing franchise fees are payable in return for this continued support.
Depending on the industry and services provided, these fees vary in amount. According to the German Franchise Association, they average around 6% of net revenue. In most cases, they are paid to the franchisor on a monthly basis, or in some instances quarterly or semi-annually.
The supporting services comprise:
- Ongoing support and advisory services
- Organisation of training and professional development sessions
- Maintenance of infrastructure (IT systems, supply chains)
- Development of the system (quality assurance, optimisation, franchise manual)
- Administrative tasks (billing)
- Current market and competitive analyses
- Various statistics, profit and loss statements, and operational benchmarks
- Franchisor's profit shares
Some franchise systems charge a separate advertising fee in addition to the ongoing fee, if this is not already included in the franchise fees.
3. Marketing Fees
This fee finances regional as well as national and supra-regional marketing and PR activities. The marketing fees of all franchisees are pooled into a shared advertising fund and managed by elected representatives; the fee amounts to 1–3% of each franchisee's net revenue and is likewise paid on a monthly basis.
Please note: Unfortunately, there can also be hidden costs!
4. Hidden Fees
Caution is advised if the full entry fee is charged again when renewing an existing contract or opening a second location.
The entry fee represents the consideration for the initial integration into the existing system. It is therefore by no means appropriate to charge the full fee again. In this case, the franchisee should always renegotiate in order to secure better terms. The aim should be to reduce the fee significantly, so that you are truly only paying for the effort incurred by the franchisor's head office.
You also need to pay close attention to ongoing fees
5. A Word of Caution
As a general rule: when in doubt, check everything twice. Whether the monthly fees are appropriate is something that is almost impossible to judge right before starting your own business.
In retail, ongoing fees are increasingly being waived, as the charges are already included in the supply prices of the contracted products. The costs are often difficult to identify at first glance, which is why prospective franchisees should always scrutinise all the figures carefully.
A good deal more questionable is when additional charges for services provided by the franchisor appear in sections of the franchise agreement where no further costs or fees would normally be expected. Common examples include accounting fees and software usage fees. Particularly dangerous is when such charges are not mentioned at all and are only demanded by the franchisor after the fact.
Reputable franchise systems inform prospective franchisees transparently about all costs and fees that may arise. During the advisory process prior to signing, and throughout contract drafting, every cost item is clearly explained and justified.
If you have any doubts, don't hesitate to ask twice. It is also advisable to seek advice from an expert in order to address all outstanding questions.
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Source of average fee values: German Franchise Association