What is the Initial Franchise Fee, and How Does it Work?

what are the costs associated with operating a franchise

Your Guide to Franchise Ownership

There is an estimated 775,000 franchise establishments in the U.S., and that number continues to grow. Why? Because the franchise model works! By leveraging a proven system, support and training, you can step right into a franchise business much more seamlessly than starting from scratch. But you have to do your due diligence... and that's where the IFPG Franchise Buyer's Guide comes in.

By arming yourself with knowledge and information, you can be well on the way to a new path as a franchise business owner. We have you covered every step of the way!

Get Started

The Initial Franchise Fee is a One-Time Payment for the Right to Own and Operate the Franchise

When contemplating whether or not to invest in a franchise, you likely have questions about the fees you’ll have to pay and what they cover. What are the costs associated with operating a franchise? What does the initial franchise fee cover? As a prospective business owner, you cover all franchise startup costs that the franchisor outlines in the Franchise Disclosure Document (FDD). In franchising, there are two types of franchise fees: an initial franchise fee and ongoing franchise fees.

What Does the Initial Franchise Fee Cover? 

The initial franchise fee is the upfront, one-time payment the franchisee pays the franchisor when a franchise agreement is signed. The franchisee now can use the company’s trademark, operating manuals, proprietary materials, and computer software. This fee is defined in detail in item 5 of the FDD.

Many factors determine the cost of franchise fees. These include the complexity of the franchise system, the business’s profitability, and the company’s costs for development and acquisition. What the franchise fees cover can differ from business to business, but some items covered by fees can include:

  • Initial training
  • Location selection 
  • Employee recruitment and training assistance
  • Pre-opening support
  • Marketing tools
  • Site build-out assistance
  • Supplier access

There are ways to determine if the cost of a franchise fee is justified. For example, weigh a fee’s cost against the expenses of starting a similar independent business, the training involved, and the third-party services used during the process.

When establishing a franchise fee, it is also important to remember that this fee can help a company’s cash flow and initial growth. On the other hand, the royalty fee income and income from sales are important to the company’s long-term profitability. Companies should not focus on making a huge profit from the initial fee, which can deter prospective franchisees from investing in the franchise. 

How Much Does the Franchisor Net?

When it comes to the percentage of the initial franchise fee the franchisor nets, it differs depending on the company. Some companies decide to “break-even” on this fee in order to attract candidates. Other franchisors may even decide to lose money on the deal because they know that they’ll make up for it through the ongoing royalty fees the franchisees pay.

It is not uncommon for a franchisor to “net” 25% or more of the total franchise fee, which is also partially a recoup of expenses that they previously incurred. These expenses include franchise development costs, production of advertising and marketing materials, and advertising costs. Thus, revenue generated from the franchise fee is usually higher than the gross profit. Consequently, the gross profit generated from the franchise fee increases as additional franchises are granted and some costs are reimbursed.

What if You Don’t Pay Franchise Fees?

There are consequences if you don't pay franchise fees. Since these fees are detailed in the FDD, you can be terminated or subject to legal action for failure to pay. A reason why some franchisees may withhold payment is that they are displeased with their franchisor and feel they aren’t being sufficiently supported. Withholding payment can express this displeasure. But legal experts suggest that withholding payment isn’t the best option, as nonpayment would give franchisors significant leverage in litigation.

Franchise Attorneys and Franchise Consultants

When considering if franchising is right for you, speak with a Franchise Consultant, an expert who looks at your finances, skills, and experience to determine if franchising is right for you. Along with meeting a consultant, consulting with a franchise attorney will help you better understand your franchise agreement and the FDD. These professionals can save franchisees and franchisors alike a lot of legal trouble and headaches. 

What is the Initial Franchise Fee, and How Does it Work?

In terms of franchise costs, the initial franchise fee is a one-time payment for the right to a franchise’s trademarks, operating systems, proprietary materials, and more. Employee recruitment and training assistance, pre-opening support, marketing tools, site build-out assistance, and more are covered by the franchise fee. If you don’t pay your fees, you can be terminated or face legal action. Paying royalties and other fees are an important part of franchise ownership. For a better understanding of the initial franchise fee and how franchise ownership works, speak with a Franchise Consultant and attorney. Doing your due diligence before buying a franchise can help you from being part of the 20% of businesses that fail in the first year.

Top 100 Franchises

AAMCO Franchise
Budget Blinds Franchise
CertaPro Painters Franchise
College Hunks Franchise
Fast Signs Franchise
Great Clips Franchise
Huntington Learning Center Franchise
Liberty Tax Franchise
MAACO Franchise
Molly Maid Franchise
Signarama Franchise
Urban Air Adventure Park Franchise
Five Star Painting
Native Ceuticals Franchise
Oxi Fresh Franchise
Start Your New Career Today
IFPG Members at Top Golf

Earn Money Selling Franchises

Do you love helping people? Does the idea of being your own boss appeal to you? A career as a Franchise Consultant lets you have it all: a flexible, home-based business with incredible earning potential. And here’s the best part—your work will make a difference! IFPG provides:

  • Over 150+ Hours of Continuing Education
  • 90 Days of Mentorship
  • Exclusive Agreements with Franchises
  • Over 600+ Franchise Members to Present to Clients
  • Access to Leads and CRM to Close Deals

IFPG also provides you with a CFC Certification that designates you as an expert in your field and grants you the recognition that you deserve.

Get Started

Learn More About IFPG



IFPG Consultants have one common goal: helping aspiring entrepreneurs realize their dreams of business ownership.


JOIN|#1 Broker Organization

IFPG has been ranked #1 Franchise Broker Organization 5 years in a row in Entrepreneur Magazine.


GET|Certified with IFPG

Learn how to earn money selling franchises and become a Certified Franchise Consultant.

background image

Schedule a Free Tour with IFPG

Red Boswell Headshot

“IFPG’s mission is to serve the franchise industry with innovation, growth and opportunity. We do that by constantly improving and adding to the value we bring our members. Find out why more than 1,500 of the industry’s most respected professionals chose IFPG. Schedule a one-on-one virtual tour with a member of our team. Thank you for the opportunity to serve you.”

Red Boswell, President