How Franchise Fees Work

How Franchise Fees Work

Owning a franchise is a rewarding endeavor that, if managed correctly, can result in unparalleled job satisfaction alongside financial and lifestyle freedom. However, there are a few financial factors that can be sources of confusion for first-time franchisees. In particular, franchise fees can appear more complex than they really are. In this blog post, we'll break down the nature of franchise fees and how they can be dealt with.


Are franchise fees annual?

Franchise fees aren't annual insofar as there's usually one upfront payment and possibly monthly or annual fees on top of that. Typically, upfront franchise fees usually range from $10,000 to $80,000. The franchise fee, however, provides you with the rights to use the brand and trademarks. However, the franchise fee also comes with other benefits, such as training (depending on the industry and negotiations, this training could be just a handful of hours of online training or weeks of hands-on site experience).

Additionally, the fee entitles you to support the franchise opportunity, such as guidance in promotion, training, recruitment, apparatus and so forth, alongside functional assets such as operations manuals and the website. The franchisor also usually contributes towards the funding and organisation of the opening event of the franchise.

Are franchise fees tax deductible?

Franchise fees are tax deductible - if accounted for correctly. To do so, franchise fees are amortized using a method that means the same amount is amortized monthly or annually. This permits the franchise fee to be recognized on your annual business income tax return. A franchise consultant can generally answer any specific questions pertaining to industry or costs.

Are franchise fees amortized?

Franchise fees are amortized. There are two ways of amortizing the lump sum fee from the agreement which is an important part of a franchise business plan. The fee can be amortized annually, in which case you can split the franchise fee by its useful life (here, you could think of useful life as the number of years on the franchise agreement). For example, if you pay $20,000 for 10 years of useful life, then amortize $2,000 every year. Alternatively, you could break this down into about $170 a month. Either way, debit the amortization account by the required amount and then credit the Accumulated Amortization account by the same amount.

Are franchise fees negotiable?

Franchise fees are negotiable- with certain considerations. Though franchise fees can be negotiated during the agreements, many franchisees choose not to. It's worth taking an objective view and working out what the value of the franchise means to do. Consider the franchise agreement and ensure that you're happy with the expected returns.

If you'd like to negotiate your franchise fee, however, it's advisable to discuss your position with a qualified and reputable franchise attorney who can give you their perspective on the probability of concessions. While it's important to establish a strong franchisor/franchisee relationship for the coming years, it's also your prerogative to note any areas of the agreement that you feel uncomfortable with.

Though many franchisors may not be willing to concede the fee, there's a reasonable chance they may be amenable to changes in the royalties and territory terms. Always feel comfortable asking for changes in more minor aspects of the agreement, such as funds for the grand opening event or oversight during the first month/s of operation of a construction franchise for sale. Once again, it circles back to considering how valuable a prospective franchise is - if it's a high-quality opportunity, the franchise fee will be amply returned through the course of ownership.

Are you interested in owning a franchise? Discover our range of handpicked franchising opportunities all across the USA – book your free consultation today. Alternatively, if you have any questions about franchise fees or would like more insight, get in touch today.

The History Of Franchising

History of Franchising

The History Of Franchising

Franchising is a rich and interesting part of American business history. Today, franchising continues to be a core factor in global innovation. Throughout the history of franchising, there have been several notable touchpoints where trailblazers have established tactical business arrangements that closely resemble franchising as we understand it today.

History of Franchising

The history of franchising started in the Middle Ages when people would enter agreements with tax collectors. The monarchy in England and other parts of Europe would bestow land to their citizens in return for cultivating armies, carrying out tax collecting duties and building toll roads.

However, the practice in its current form didn't flourish until the 20th century in America, though there have been several notable case studies of franchising opportunities before then.

What was the first franchise?

The first franchise was in 1731 when Benjamin Franklin entered an agreement with Thomas Whitmarsh in Philadelphia. Though they termed their agreement a 'co-partnership' - as the word 'franchising' hadn't been invented yet, the agreement terms looked suspiciously like a franchise for sale Philadelphia, where they negotiated branding and disbursement rights. Whitmarsh would be given the rights to print Franklin's works in exchange for buying his printing materials exclusively from Franklin. Later, Benjamin Franklin would enter franchising agreements with several vendors.

When did franchising start?

Franchising started in 1731with Benjamin Franklin's 'co-partnership' business agreement but really hit its stride in the mid-20th century when beverage and Texas food franchises became highly popular and profitable. Since then, franchising expanded to incorporate a number of industries, such as fitness gym franchises, accountancy, photography, automation, and so forth.

Some high-profile franchises that helped normalize franchising as a lucrative business investment include:

  • Coca Cola - the global giant, which has consistently ranked in the top five richest companies in the world, started as a franchise. In 1889, the company began to sell the rights to businessmen owning the means to produce it on a large scale. Part of its success was its recognizable bottle shape and patented secret formula. Coca Cola's ingenious franchising system also allowed them to uncover new untapped markets and territories, allowing the sensation to sweep across the world.

  • 7-Eleven. The popular retail franchise had a humble beginning as a handful of convenience stories. However, one of its founding directors, Joe Thompson, ensured that the staff would be trained and given uniforms so that customers would receive the same quality of service at each store. The franchise also stumbled upon a niche in its unprecedented opening times - 7am to 11pm.

The 20th century also saw the beginning of a number of other highly popular and successful franchise business plans, such as Western Union, Wendy's, Hertz, and hundreds more.

Who invented franchising?

Franchising was invented bya number of ambitious people. Though technically it has no founder, it has a long history of innovation and well-judged investments.

For example, one of the earliest franchises was the Singer sewing machine, developed by Isaac Merritt Singer in 1851. Singer traded local company control for a share of the profits, a straightforward way of expanding his brand of sewing machines. Singer also provided each franchised factory with the equipment and specialized products to enable a consistent and recognizable brand. The Singer sewing machine empire continues today, shaped by Singer's legacy of clever branding and distribution rights. Singer's franchising displays the power and longevity of successful franchising.

If this article has inspired you to consider owning a franchise, you can book your free consultation on our home page. Guerrilla Franchising is proud to offer an expertly chosen selection of franchising opportunities across various industries and parts of the USA. We match franchisees with their perfect opportunity and support them throughout the management process. To discover more about our services, please get in touch.

6 Telltale Signs Of A Poor Franchising Opportunity

6 Telltale Signs Of A Poor Franchising Opportunity

When conducting due diligence on a potential franchise investment, it is essential to thoroughly research each opportunity. It is important to be aware of potential warning signs that may indicate underlying problems. Here are a few issues to be cautious of:

Business sale growth and expand shop franchise concept, Store illustration print screen on wooden cube block connection link with others shop and supermarket.

1. The Franchisor is Unprofessional or Evasive

When evaluating franchising opportunities, it is essential to ask pertinent questions and carefully scrutinize the franchisor's responses. If the franchisor is unprofessional, evasive, or overly aggressive, it is a red flag. If they do not treat you with courtesy and professionalism during the sales process, it is unlikely that they will be any easier to deal with as a franchisee.

2. Existing Franchisees Are Unhappy

If a significant number of current franchisees seem unhappy, it is best to consider other franchise opportunities in Texas. Ideally, you should speak with franchisees who are content with their business's financial results and the value they receive from the franchisor.

3. High Franchisee Turnover Rates

During the due diligence process, you should review the Franchise Disclosure Document (FDD). The franchisor must disclose the history of franchisees who have left the system and the reasons for their departure. A high rate of turnover can be a warning sign, and you need to determine if it means the business is not consistently profitable.

You should differentiate between units that close due to owner failure and units that the owner sells as an exit strategy. In a younger franchise system such as salon suites franchises, significant turnover should be thoroughly investigated. If turnover is a result of franchisee terminations, this is cause for concern. Turnover due to the resale of successful units is a different matter.

4. The Franchise or Franchisee Has A History of Litigation

Review the Franchise Disclosure Document (FDD) to determine if the franchisor has a history of litigation. As a general rule, more than one or two cases per 100 franchisees could indicate a problem. It is important to examine the contested issues to differentiate, for example, actions brought by the franchisor against franchisees who are not paying their bills versus those brought by franchisees alleging misdeeds by the franchisor.

5. It All Seems Too Good To Be True

We've all heard the saying and unfortunately, in franchising, it rings especially true - 'If something seems too good to be true, it usually is'. If a franchisor is unwilling or unable to acknowledge and disclose the flaws in it's business, it is a warning sign. Transparency is essential, and a franchisor should inform prospective franchisees about both the challenges and benefits of their business.

6. Lack Of Or Poor Quality Training

Insufficient Training and Support are critical issues that can impede the success of a franchise. One of the unique features of a franchise is its established business model & franchise business plan, which franchisees follow to achieve a similar level of success. This process requires constant and effective support from the franchisor, which ultimately benefits both parties.

When a franchisor fails to provide adequate training or assistance, it may indicate that the operating system is untested or that they do not prioritize the success of their franchisees. Additionally, frequent changes to the franchise model can become increasingly difficult for franchisees to keep up with, hindering their ability to achieve success.

For more information or questions regarding your situation you can get in touch with our franchise consultant Dan Lorenz & for a limited time even book a strategy session in with him via our home page.