Costs involved in franchising

It’s better to call franchising a team business rather than just a business. In franchising not only the risk, but even the cost is shared by both the parties. Franchising as a business has many costs, some of which are unique like royalty, initial payment etc while others are more routine like advertising, marketing etc. These costs are divided between the franchisee and the franchisor. Let’s have a look at the various costs that are borne by the franchisor as well as franchisee.

Cost to the franchisee

• Franchise Fee This is the initial fee that has to be paid by the franchisee to the franchisor, in order to use his brand name and business model. On payment of this fee the franchisor will help train your staff, help you in selecting the right location and guide you in starting up your franchise. This is basically a fee that the franchisee pays to be a part of the franchisors business.

• Capital Investment The franchisee will also need capital to buy various things such as commercial space, machinery, office equipment etc. In case of some large franchisors this amount can be huge.

• Working Capital Apart from the above mentioned costs, one also needs good circulation of working capital to keep the business running smoothly on a daily basis. The various costs included under this section are staff salary, raw materials, distribution fees, monthly rent etc.

• Royalty Also a franchisee has to pay the franchisor a royalty for using his brand name and product/service. Also in some cases this royalty will be coupled with a percentage of commission based on sales.

Costs to the Franchisor

• Pilot Franchise More often than not, most franchisees prefer operating a pilot franchise before getting full fledged into franchising. This pilot franchise needs a lot of investment for commercial space, staff, machinery etc.

• Legal cost A franchisor should hire an expert lawyer and get a good franchise agreement prepared by him. This involves legal cost.

• Marketing and advertising It is the duty of the franchisor to ensure that his brand is marketed and advertised well. Advertising today costs a lot of money. Also the franchisor will have to prepare a lot of promotional material and get it distributed, all of which involves cost.