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Franchise Facts: Basics of Fees and Royalty and What Happens If They Go Unpaid

As a franchisee, you get access to an established business structure but there are costs that you must pay in order to achieve that. With more than 900,000 franchise businesses located across the United States providing all different kinds of services and goods, it’s important to see that purchasing a franchise is like an investment. The franchise agreement will stipulate your responsibilities as it relates to royalties and franchise fees. The person who is selling you the franchise is responsible for setting the fees.

As the franchisee, you should always read the franchise agreement carefully to ensure you know what to expect. A franchise or royalty fee is quite common in these agreements, but it’s critical to know what you’ll need to pay.

There is no particular formula that they may use to determine the amount and the franchise fees can vary significantly. Typically, they cost somewhere between $10,000 and $50,000, however, the actual cost of your franchise fee can be much higher. You are essentially getting the benefit of joining the franchisor’s established business system and being able to use their product or system. This also includes their trade secrets, proprietary materials, trade name, operating manuals and other details.

You may also be given certain help in starting your franchise business. Bear in mind that the franchise fee is most often non-refundable. This means that you will not get it back in any situation. Your franchise agreement, however, may stipulate any exemption clauses that could allow you to recover your franchise fee if you were to cancel your entire investment within a certain period of time. In addition, the franchise fee that you need to pay at the outset you may also be responsible for the royalty payments to the franchisor over the life of your individual business and the franchise agreement. Royalties will usually cover items like:

  • Updating operating manuals
  • Consulting
  • Training
  • Advertising and promotions

In the event that you are unable to pay your franchise fee you may be violating the terms of your franchise agreement and this could lead to legal action and the cancellation of your individual franchise. It is strongly recommended that you consult with your business planning attorney in the event that you are concerned about the stipulation for franchise fees and royalty fees or your inability to pay them in a current period in time.

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