Small Business Advice - Franchise and Royalty Fees

Alex Fees: Franchise fees are a big part of the investment of a franchise but what do you get for your franchise fees? What do you get for your money? Our guest today knows that answer. He knows a lot about franchises. Dick Rennick is an award winning founder of a 360 unit franchise system that has a leak, detection and repair— Dick Rennick: Yup, correct. Alex Fees: He graduated onto other things including he is the former of the International Franchise Association. He is recognized as one of the leading experts in franchising and we are happy to have him here at sbtv.com. Dick, thank you very much for being here. Dick Rennick: Thank you. Alex Fees: I appreciate it. Dick, what are franchise fees? Dick Rennick: Franchise fees is what you pay to the franchisor. The franchisor is the company that awards the franchisee. The franchisee is the one that receives it. So, if you look to the franchise or he awards you the opportunity to have the right to open their franchise in that area and those franchise fees could be from as low—I’ve seen them as low as $3,500.00 for a franchise fee to as high as $50,000.00 for a franchise fee. And that franchise fee is strictly for the right to own the license agreement to franchise that particular product or service franchise. Alex Fees: So, you’re buying in? Dick Rennick: You’re buying in, exactly. Alex Fees: Okay, what should a person expect to pay for franchise fees if they were to purchase a franchise? Dick Rennick: Well, it varies, the franchise fee, people say, “Well, I’ve heard a franchise is costing a $150,000.00 and I’ve heard them costing a million.” What they don’t understand is that that’s not just a franchise fee, that’s the entire con glamour of fees to build out, to build a building, to give you an example if you had a fast food franchise that you were going to buy and maybe the license fee was $25,000.00 but to build a store was a half a million and to put all those stuff inside the store is another $150,000.00. You may have three quarters a million dollars. Alex Fees: Right because there’s a lot of infrastructure in such once you get access to the franchisor. Dick Rennick: Exactly. Alex Fees: What about royalty payments? What are those? Dick Rennick: Royalty payments are what keeps the franchise system going. The franchise or its job is to protect and enhance the brand, protect and enhance the culture and to share the vision of the company with everybody in the system. The royalties are fees the he collects from the franchise system that helps him do that. Alex Fees: From the franchise—he collects those from the franchisee? Dick Rennick: From the franchisee and royalty fees can be as low as 3% to as high—I’ve seen them as high as 10%, 11%. Most of them ran between 5% and 8% of the gross revenues. So, the franchise owner takes that money and he was able to run the corporate stuff. He’s able to run the research department, all these fees go to run the system. Alex Fees: What about advertising, Dick? How does that figure into the equation here? How much is a franchisee expected to spend on advertising? Dick Rennick: Well, there is two answers to that question. Most franchisor have inner franchise document and they add fund and this add fund is moneys that they collect on top of the royalties. It could be anywhere from 1% to maybe 3% for a national add fund. And what this does is allows the franchisor along with the franchisees to advertise and market the brand regionally or nationally. But the franchisee himself outside to that marketing fund, most of them are expected to expand anywhere from 5% to 10% of their growth revenues in marketing their business and their brand. Alex Fees: So, the franchisee does have some digression and as far as local advertising is concerned? Dick Rennick: Yes, he does. Alex Fees: But that is or is not a part of that advertising fund that the franchisor has? Dick Rennick: Usually it is not a part of that advertising fund. There may be some variances to that but usually these are things that the franchisee may have to have like yellow pages, maybe they’ve got to have make up some door hangers, maybe they are deciding to do some local television for their services or products that they are expanding. So, that is outside of that and usually those numbers are outlined during your discovery day process of the franchisee when he’s still you know going to the franchise or to find out what’s expected and those expectations are usually shown in the franchise document that you signed. That says, we expect you to expand these amounts of money in the local advertising. Alex Fees: Dick, what do you generally find regarding these franchise agreements for things like say, that it’s a fast food restaurant, the health department inspection or who pays for licensing, the local licensing, things of that name? Dick Rennick: The franchisee does. Alex Fees: The franchisee. Dick Rennick: That all drops—see everyone on these franchisers are all independently owned and operated and most franchise document say that this franchise is independently owned and operated. So you’re giving them the right to have your brand, you’re given to use the trademark but those responsibility is yours. It could be a contract license, it could be a city business license, it could be a health department license and you have to have ADA approval. You may have to meet all requirements, those things all fall to the franchisee but the franchisor’s probably already done his due diligence and can help you through those process. Alex Fees: So, once a franchisee buys in those local expenses become his or hers? Dick Rennick: They do. Alex Fees: All right, Dick Rennick, thank you for joining us here. You can look for other segments on franchising and small business from Dick here on sbtv.com. You can learn more about Dick Rennick and his franchise consulting company by going online to www.teamrennick.com. This is sbtv.com. Small business is our only business.