Franchise fees can feel complicated, but with a little calculation, you can easily know what franchisees are expected to pay and the benefits you get from them. As a new entrepreneur interested in launching a franchise, understanding these fees is crucial for making an informed decision.
Understanding Franchise Costs
Franchising can be a path to business ownership for people interested in pursuing entrepreneurship. And, at least 61% of franchises are currently profitable, according to a survey conducted by Guidant Financial.
Franchising’s various fees are the costs associated with obtaining and maintaining a franchise license. They serve as the financial foundation of the franchisor-franchisee relationship. These franchise fees not only grant you the right to operate under the franchisor's brand but also provide you with various forms of support, such as training, marketing, and ongoing assistance.
Here’s a close-up of some of the common fees associated with franchising.
- Initial Franchise Fee: The initial franchise fee is a one-time payment made to the franchisor to buy into the franchise. This fee covers the cost of training, support, and other startup services. For example, Creative Colors International (CCI) is the mobile leader in leather and vinyl restoration. Our service technicians fix rips, tears, cuts, burns, scratching, and fading in leather and vinyl for residential customers and local businesses in a wide variety of industries, including car dealers, marinas, restaurants, and medical offices. To get started, we require an initial franchise fee of $49,500, which includes comprehensive training and ongoing support.The total initial investment for a CCI franchise is $86,980 and $102,100, including the franchise fee. About 32.7% of all franchisees invest between $50,000 and $175,000 in their new venture. Nearly 45.5% invest more than $175,000. Our initial investment also includes the cost of your mobile van, which is equipped with all the tools you’ll need, including a compressor, generator, hoses, heat guns, dyes, graining molds, and a full line of supplies. To help cut costs we partner with Enterprise Fleet Services to provide professional, cost-effective fleet management to each CCI franchise so they can spend time on their business, not their vans.
- Royalty Fees: Royalty fees are ongoing payments made to the franchisor, usually calculated as a percentage of your gross sales. These fees cover the continuous use of the franchisor's brand and ongoing support services. CCI charges a 7.5% royalty fee, which is a standard rate in the industry.
- Marketing Fees: Marketing fees are another type of ongoing fee that covers the cost of national advertising campaigns. These fees are often calculated as a percentage of gross sales, similar to royalty fees. CCI, for example, charges a 1% franchise advertising fee.
- Renewal Fees: Once your initial franchise agreement term expires, you'll likely have the option to renew. Renewal fees are one-time payments made to extend your franchise agreement for another term.
- Miscellaneous Fees: Some franchisors charge additional fees for services like technology support, audit costs, or transfer fees if you decide to sell your franchise. These fees can be either one-time or recurring, depending on the franchisor.
Calculating Performance-Based Fees
Royalty and marketing fees are often based on performance, specifically your gross sales. To calculate these fees, you'll need to multiply your gross sales by the percentage rate specified in your franchise agreement. For instance, if your gross sales for the month are $100,000 and the royalty fee is 7.5%, you would owe $7,500 in royalty fees for that month.
Performance-based fees ensure that the franchisor's earnings are directly tied to your success. This creates a vested interest for the franchisor to provide robust support, effective training, and impactful marketing strategies to help you succeed. The better the franchisee performs, the more both parties benefit. Performance-based fees incentivize you to increase sales and grow the business. The more you earn, the more you'll have to pay in fees, but your net profit will also be higher.
One-Time vs. Recurring Fees
Initial and renewal fees are one-time payments, while royalty and marketing fees are recurring and usually paid on a monthly or quarterly basis. Miscellaneous fees can be either one-time or recurring, depending on the specific fee and the franchisor's policy.
The Benefits of Franchising with CCI
Franchising offers several benefits, including a proven business model, brand recognition, and ongoing support. CCI takes these benefits to the next level by providing a low initial investment and multiple revenue streams, allowing franchisees to partner with businesses in their community, such as auto dealerships and medical facilities, to provide B2B services. CCI’s service technicians can save customers up to 90% of replacement costs.
“It’s always a leap of faith when you start a business, but this one was an easy one because the business is out there. That’s why I went with them,” said Jim Faber, a CCI franchisee.
Request franchise info to learn more about how to partner with CCI to launch a repair and restoration franchise in your community.
