The Rules

There are two groups involved in a franchise, the franchisor (the person or company leasing the rights to the business name and system) and the franchisee (the person who purchases it).

The right to the franchise is sold by the franchisor to the franchisee for an initial sum of money, often called the up-front entry fee, or franchise fee. This money will be paid once the contract has been signed. The contract (franchise agreement) details the responsibilities of both the franchisor and the franchisee, and is usually for a specific length of time (typically several years). Once the contract expires, it must be renewed. State laws often have an impact on the options for this renewal.

This initial franchise fee doesn't include anything except the rights to use the name and system, and sometimes training, procedures, manuals, and other assistance like site selection. It doesn't include any of the necessary inventory, fixtures, furniture or real estate.

In addition to the franchise fee, the franchisee must pay the franchisor royalty fees, or other on-going payments. These payments are usually taken as a percentage of sales, but can also be set up as a fixed amount or on a sliding scale. The terms of these fees will be spelled out in the franchise agreement. These payments are for the on-going services and support that the franchisor provides. Franchisors may also sell supplies directly to their franchisees.

Advertising funds are also paid periodically. These funds are usually put into a general account and used for national and regional promotion for the entire chain.