What fees should I expect to pay for my franchise?
There are basically two types of fees you should expect to pay for your franchise - upfront fees and ongoing fees.
The first is the initial upfront fee, which is what you pay the franchisor for the rights open your franchise. Essentially, you are purchasing the rights to use the franchisor's trademarks, business methods, and distribution rights. This licensing charge can be significant, especially for a well-known, established franchise -- it's not unusual for it to be in the few hundred of thousands of rupees. Often, it is also based on the value of the territory or trading area, so the larger your market, the more you could end up paying.
Be aware that this upfront fee may be in addition to any other start-up costs you will have to incur. The initial franchise fee may or may not include things like training costs; start-up promotional fees; inventory; build-outs (some franchisors require your space to have specific architectural elements); equipment/fixtures (you may be required to purchase or lease specific equipment and fixtures from the franchisor); and any other costs that are necessary to open your business.
You will also have to pay ongoing fees to maintain the rights to your franchise. Most franchisors charge a royalty fee, typically a percent of your gross sales, not your profits. This royalty fee can range from 1 percent to as much as 15 percent, although 5 percent is typical. Remember, you are paying this royalty on gross sales (your total receipts, less sales tax, returns and refunds), so it can potentially take a significant bite out of your profits.
Some franchisors charge a regular fee (payable weekly, monthly or quarterly) in lieu of royalty payments. This type of fee may also be part of the mark-up you are charged for goods or services you are required to purchase.
It is also common for franchises to pay a portion of the franchisor's local, regional and national advertising and promotional costs. These fees are usually put into a cooperative advertising fund that ultimately benefits all franchises through increased exposure to your trade name.