The Franchise Hidden Fee Checklist

Buying a franchise can feel safer than starting a business from scratch. You get the brand. The systems. The training. The playbook.

But there's one number prospective franchise owners often focus on too much: the royalty fee.

A franchise might advertise a 6% royalty—but that doesn't necessarily mean the franchise costs you 6% of your revenue. Once you include advertising contributions, technology fees, required local marketing, transaction fees, vendor markups, and other charges, the true cost of belonging to the franchise system can be significantly higher.

Before you sign anything, use this checklist to understand where your money actually goes.


 

Part 1: Understand the Royalty

⃞  What percentage of my revenue goes to the franchisor?

⃞  What exactly is the royalty calculated on? Gross sales, net sales, collected revenue, or something else?

⃞  What is excluded from "gross revenue"? Sales tax? Refunds? Discounts? Chargebacks? Gift cards? Bad debt?

⃞  Is there a minimum royalty payment? If I have a terrible month, do I still owe a minimum amount?

⃞  Can the royalty percentage change? Does it increase over time, at certain revenue levels, or when I renew?

⃞  When do I owe the royalty? When I invoice the customer—or when I actually get paid?

⃞  If a customer gets a refund or issues a chargeback after I've paid the royalty, do I automatically receive a credit?


 

Part 2: Look Beyond the Royalty

The royalty is only the beginning. Ask:

⃞  What other fees are based on revenue? Advertising funds, technology fees, management fees, training fees, platform fees, etc.

⃞  Am I required to spend money on local advertising in addition to the national advertising fee?

⃞  Are there transaction or processing fees on top of the royalty?

⃞  Are there mandatory software, CRM, booking, POS, or technology costs?

⃞  Are there required vendors—and does the franchisor receive rebates, commissions, or other compensation from them?

⃞  Do royalties apply to ancillary products or services I introduce?

⃞  Do I owe royalties on customers or leads I generate completely on my own?

⃞  Do royalties apply to things like cancellation fees, delivery fees, service charges, insurance proceeds, or other nontraditional revenue?


 

Part 3: Find Out What Happens When You Grow

More revenue doesn't always mean proportionally more profit.

⃞  Are there revenue thresholds that trigger additional expenses? More employees, larger facilities, equipment upgrades, additional software, etc.

⃞  As franchisees grow, do their margins typically improve or shrink?

⃞  Can you show me the economics at different revenue levels? Ask to see what happens at $500K, $750K, $1M, $1.5M, or other realistic sales levels for the franchise.

⃞  How have franchise fees changed over the past 5–10 years?

⃞  Which fees can the franchisor increase after I sign?

⃞  When my franchise agreement renews, can I be required to accept the fee structure contained in the franchisor's then-current agreement?


 

The Question to Ask Existing Franchisees

Don't rely exclusively on what you're told during the sales process. Talk to existing franchise owners. Then ask them:

"As your revenue grew, did your margins get better or worse?"

Follow it with:
"What expenses surprised you after you became a franchisee?"

Those two questions may tell you more than an hour-long sales presentation.
 

 

 

Contract vs. Reality

There are really two separate things you're trying to understand.

1. What CAN they charge me?

Review the Franchise Disclosure Document (FDD) and franchise agreement carefully to understand the fees the franchisor is contractually permitted to charge. Pay particular attention to Items 5, 6, 7, 8, 11, and 19 of the FDD, where applicable.

2. What WILL I actually pay?

That's where conversations with current—and ideally former—franchisees become extremely valuable. Ask what they're actually spending. Ask what's gone up. Ask what wasn't obvious beforehand. And ask what they wish they had known before signing.


 

Before You Sign

Don't ask only: "What's the royalty?"
Ask: "What is the true cost of being part of this franchise system?"

The advertised royalty rate is only one piece of the equation. Your job is to uncover all of the costs, obligations, and fees that come with being part of the system—before you sign the agreement.



This checklist is intended for general educational purposes and is not legal, financial, or investment advice. Before purchasing a franchise, consider having the FDD and franchise agreement reviewed by a qualified franchise attorney and reviewing the economics with a qualified financial professional.

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