In this article, Minnesota franchise attorney Aaron Hall defines the franchisor, the franchisee, and their relationship, explains the different types of franchise fees, and identifies an important way to learn more about a franchise opportunity as part of your “due diligence” before buying a franchise.
Table of Contents
The Franchise Relationship
People who are looking at buying a franchise, like McDonald’s or another franchise company, often have a lot of decisions to make. The process can feel overwhelming.
We begin with understanding the important terms.
A “franchisor” the company offering a franchise opportunity. For example, McDonald’s is a franchisor.
The “franchisee” is the individual business owner who wants to own a local business under the large franchise brand. Franchises can pay anywhere from $5,000 to $300,000 or more to buy a franchise. The cost really depends on what are you getting from the franchise.
Buying vs. Renting a Franchise
Buying vs. Renting a Franchise. In the franchise industry, we say you are “buying a franchise.” However, what you are actually doing is essentially “renting” the brand for a term of years. Typically, once you stop using the brand name, you need to turn over your customer list, contacts, and business to the franchisor and agree you will not compete in the industry for a few years.
What are Different Types of Franchise Fees?
Franchisors (the brand company) earn money from franchisees (the local business owner) in two ways: startup fees and ongoing fees.
First, the franchisor earns money when some new person enters into a franchise agreement. Second, the franchisor ongoing fees from use of the franchisor’s brand and sales of the franchise’s products and/or services.
Sometimes a franchisor has a heavy fee at the beginning, and not much of a fee on an ongoing basis. That generally means they are not going to provide much support on an ongoing basis. Sometimes a franchisor does not have a high startup fee, so there is not a high barrier to entry, but you are required to buy your products or pay a marketing fee to them, which means a franchisor is going to make money year-after-year, but in return, the franchisor should be providing more support to you.
For example, if you start a McDonald’s restaurant, McDonald’s earns a fee when you start your restaurant. That fee covers startup costs, training, marketing fees, etc. McDonald’s also earns money from licensing its brand to you, selling food products to you, and selling you equipment, uniforms, and supplies.
Virtually every franchisor is required to be registered in the state of Minnesota before they sell franchisees in our state. Before considering buying a franchise, make sure the franchiser is actually registered. It is a big red flag if they are not. The State of Minnesota regulates franchisors in order to protect your rights as a potential franchisee. State registration is something important to check ahead of time.