by Abigail Zhu

Created on: December 17, 2009

Costs:

Obtaining the right to use the franchisors name and its assistance may require several thousand to several hundred thousand dollars. The following is a breakdown of fees involved in operating franchises (Franchising World 2005):

- Initial Franchise Fee and Other Expenses

This is the initial franchise fee, which may be non-refundable, and includes other costs such as:

    - Business or operating licenses and insurance

   - Costs to rent, build, and equip an outlet and to purchase initial inventory

   - Grand opening or other initial business promotions

   - Product or service supply costs

    - Real estate and leasehold improvements

   - Training costs Financial and accounting advice

   - Legal fees

   - Discretionary equipment such as a computer system or business alarm system

   - Advertising fees

Franchisees may have to pay into an advertising fund, with some portion of the advertising fee going for national advertising or to attract new franchise owners, but not to target the franchisee’s particular outlet.

- Design or Appearance Standards

To ensure that customers receive the same quality of goods and services in each outlet, franchisors may impose design or appearance standards with periodic renovations or seasonal design changes (requirements), which may increase costs.

- Continuing Royalty Payments

In addition to the initial franchise fee, franchisor royalties must often be paid based on a percentage of the weekly or monthly gross income; regardless of income (profitability). Franchisor royalties are paid for the right to use the franchisor s name during the duration of the franchise agreement, even if the franchisor fails to provide promised support services.

- Renewals

Franchise agreements typically run for 15 to 20 years, after which the franchisor may decline to renew the contract. There is also the possibility that renewals need adhere to the original terms and conditions: the franchisor may increase royalty payments, impose new design standards and sales restrictions, or the franchisee’s previous territory may be reduced (due to more competition from company-owned outlets or other franchisees).

 - Franchise Terminations

If, for example, the franchisee fails to pay royalties or abide by performance standards and sales restrictions, a franchisor can end the franchise agreement. When the franchise is terminated, franchisees’

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