How to Decode Franchise Fees

You'll see a lot of numbers while shopping for franchises. Here's what everything means, and why it matters.

- MARK SIEBERT,

When you're shopping for a franchise, you'll inevitably wonder: What does it really cost to open and operate this business?

It’s a reasonable question. Franchises are complex financial systems. But know this: Your goal isn’t to just pick the cheapest option. It’s to find the franchise that you believe will drive the most business and profits. So as you look at the numbers, consider the total value they represent.

The numbers are all found in the brand’s Franchise Disclosure Document (FDD). Here’s what to consider.

The franchise fee

This is the number that everyone looks at first—the upfront, initial fee to open the franchise. It might seem high, but remember: Most franchisors don’t make a lot of profit on franchise fees.

This fee helps cover the costs associated with marketing the franchise, franchise sales, and legal documentation, as well as training franchisees and providing them with initial support until they're up and operating. So while the fee is important to know (and might seem like a lot!), it doesn’t tell the full story.

Royalty fees