What Is Franchising and Why Is It Attractive?

Franchises Come In All Shapes & Sizes

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.

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.

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.