If you’re considering joining a franchise business model, you might want to know what sort of financial investment you’ll have to make. For example, you may be wondering ‘What do franchisees usually pay to the business that owns the brand for their franchise?’
Well, the answer will vary depending on which franchise you decide to join. But, at Bridgewater Home Care, we can give you a roundabout figure to help you understand what amount you’ll need.
Read on to find out more about franchise and royalty fees, the difference between them, and whether the former is tax deductible.
So…what do franchisees usually pay when joining a franchise?
Franchisees will typically pay an initial investment to the franchisor when joining a franchise, as well as a monthly service fee (also known as a royalty fee).
For example, at Bridgewater Home Care we ask our franchisees to invest an initial franchise fee of £35,000 plus VAT, and a monthly royalty fee of 6% + VAT of their gross monthly sales. In total, the working capital requirements amount to £100,000 – £120,000.
What is the difference between a franchise fee and a royalty fee?
There is one main difference between a franchise fee and a royalty fee.
As mentioned, a franchise fee is your initial investment in the form of a lump sum, whereas the other is a type of monthly service fee. Let’s explore them in more detail below:
Initial investment or ‘franchise fee’
The easiest way to understand a franchise fee is to think of it as the cost of entry into joining an established brand.
Put simply, it’s a license fee that allows you to use a franchisor’s proprietary business systems, such as allowing you to use their branding.
Royalty fees
Royalty fees are what franchisees pay to cover the cost of the resources the franchisor has access to. It is an ongoing fee, typically paid monthly, but it can also be weekly – it just depends on the franchise agreement.
When paying a royalty fee, franchisees will typically receive access to certain resources of the franchisor. For example, they might be provided with:
- Bespoke software
- Training programmes and manuals
- Legal support
How are royalty fees calculated?
The royalty fee of a franchise will depend on the franchise you decide to join, as well as the industry and location it is in. But you can usually expect to pay anywhere from 6-14% of your gross sales or revenue.
For example, at Bridgewater Home Care, our total royalty rate is 6% + VAT. So if your gross sales or revenue is £100,000, you would have to pay £6,000 per month + VAT.
How long do I have to pay royalty fees?
As royalty fees are an ongoing payment you make to your franchisor, you will have to pay them for the entirety of your franchise agreement.
These agreements range from anywhere between 5 to 20 years, but the specific length will depend on the terms and conditions of your franchise contract.
What are the different types of royalty fees?
There are several different types of royalty fees you might encounter when looking into potential franchise agreements, such as:
Fixed percentage
This is when you pay a fixed percentage of your monthly/weekly gross sales, it’s the most common type of royalty fee.
Increasing percentage
This is when the percentage of royalty fees increases because of different factors, such as location and demand.
Decreasing percentage
This is when franchisors might decrease the cost of royalty fees to encourage a franchisee to become more profitable.
Fixed fee
As the name suggests, this is a fixed fee that franchisees pay to the franchisor. It’s usually less common as it means that franchisees might end up paying the same cost even when sales and market demand are low.
Of course, some franchisors will even have no fees within their agreements with franchisees. But this might be the result of their contract stipulating that franchisees have to pay an upfront cost for the franchisor’s products/services.
Are franchise fees negotiable?
Usually, franchise fees are not negotiable. This is because offering different fees to different franchisees doesn’t look good for the franchisor – and can cause issues as a result. Again, it all depends on the franchise you choose to join.
Are franchise fees tax deductible?
The initial fee you pay to join a franchise is not tax deductible as they are considered capital expenses. However, the monthly/weekly royalty fees you pay are, because they are deductible as business expenses. Ultimately, this reduces your overall corporation tax bill.
Are there any additional franchise fees to consider?
Again depending on your franchise agreement, there are some other additional franchise fees you might need to consider. This includes:
Marketing fees for an agency or freelancer
This will help increase traffic to your website with the aim of increasing your online visibility – so your prospective customers/clients see you as the business they want to work with.
IT support and technology fees
Your royalty fees might not cover IT support, so it’s important to factor this into your costs. This might also include the purchase of additional computers and mobile phones.
Auditing and compliance support
Maintaining your legal compliance is a necessity in any industry – but some more so than others. You might need to hire external support to ensure you meet your legal compliance and regulatory requirements for the sector your franchise sits within.
How to pick the right franchise for you: 3 tips from our founder and former franchisee, Phil Eckersley
If you’ve read the above and decided that joining a franchise seems like the right business opportunity for you, you’re probably now wondering how to pick the right franchise. Well, Bridgewater’s founder and former franchisee, Phil Eckersley, is here to help by offering four top tips on choosing a franchise:
Evaluate your current skills
There are a variety of franchises spanning a plethora of industries, so first you need to narrow it down to what sector you’d be most interested in. To do so, evaluate your current skills and previous career experience.
For example, if you’ve always worked in the health and social care sector, a franchise specialising in care services might be the best bet for you. This is because you’ll already have knowledge of the industry and will be able to adapt to a business that works within it.
At Bridgewater Home Care, our franchisees come from a variety of backgrounds, including some with little to no experience in the care industry. As long as they’re ready to put the work into running a successful franchise, the rest will follow.
Consider what you want from the franchise
The next thing you need to think about when picking a franchise is what you want to get from it. Are you simply seeing it as a business venture and a way to increase capital? Or are you interested in making a difference in your local community?
If the answers are both, look for a franchise opportunity that provides a service to those in need, whilst also being in demand – thus providing you with a better chance of making a profit.
At Bridgewater Home Care, we offer the chance for you to work in the care industry, which has a demand that grows year on year, whilst also providing you with the opportunity to improve the lives of those in your local community.
Think about what different franchises offer
Finally, take the time to consider what different franchises have to offer. For example, some franchises might not offer as much support as you may need to make a successful business.
It also helps to read franchisee testimonials, so make sure you have a look a what other people have said about joining the franchise you’re considering.
At Bridgewater Home Care, our monthly service costs cover practically everything that is required for a home care business to run effectively from day one. And our franchisees also have access to a year-long mentorship programme with me. So they can get a better understanding of the challenges of being a franchisee and how we can help them overcome them.
Find out more about Bridgewater’s low-risk, high-reward investment opportunity
Entrepreneurs can benefit from being part of an established brand when joining a franchise, providing them with a lower-risk opportunity to help their business excel.
Better yet, joining a franchise such as Bridgewater Home Care offers you a chance to make a difference in your community, whilst running a successful franchise in your own exclusive territory.
When you join Bridgewater, you’ll have access to:
- Mentorship from our founder, Phil – a former franchisee who knows the industry back-to-front
- Bespoke software to make your life much easier
- Marketing resources to get the word out about your business
- Online systems so you can work anywhere
- And much more!
Interested? Get in touch with us today by making an enquiry on our contact form, or call 01942 215 888.
