What does it take to set up a franchising business. Well, besides the unquantifiable “sweats of hard work” by the franchisees, we need to consider the initial set up costs and recurring costs to be paid to the franchisor or to its direct affiliates.

Some of the most typical costs and fees include paying:

• a one time initial fee to become a franchisee;

• Royalties or Ongoing Franchise Fees. Franchisees usually pay an ongoing franchise fee or  royalty. This fee is normally expressed as a percentage of the gross revenue of the franchised business but can also be a fixed periodic amount such as $XX per month, regardless of revenue.

• Marketing Fees.Franchises often require participation in a common advertising or marketing fund. This fund is frequently a national program, but it can also have a regional or local market focus.

• Required Purchases of Products or Services.Some franchisors also require that a franchisee purchase certain required products or services either from the franchisor or from affiliated entities of the franchise company. .

• Other. ( if any in the agreement )

Whether the initial investment and/ recurring costs will obviously rely greatly on the average return of investment from the business.

Interestingly, reported is a standard formula for calculating a reasonable distribution of business proceeds which is:

“ one-third of the average pre-tax profit margin (before any franchisor fees or costs or any franchisee compensation) goes to the company and two-thirds to the franchisee.”

Hence if say the net margin is 30 percent, then the total of all royalty and other fees should be no more than about 10 percent. It is believed that many of the most successful franchise opportunities seem to stay very close to this formula.

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