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.