What does the initial franchise fee cover?

As in many things in franchising, the answer is ‘it depends’. The purpose of the initial fee is to reimburse the franchisor the costs of granting the franchise, which include not only the cost of providing benefits that the franchisee will receive, but also the costs, such as recruitment and advertising, incurred by a franchisor as part of the recruitment process.The initial fee will certainly include all the costs of providing the franchisor’s initial obligations set out in the franchise agreement, which may include the provision of the manual, initial training, assistance with the launch of the franchise and other initial obligations. Precisely what the initial fee includes will depend on the terms of the franchise agreement, so prospective franchisees will need to look at the proposed agreement carefully.Some franchisors have an initial fee and an equipment package or start-up fee, which relates to the cost of the provision of stock or equipment. Other franchisors include this in the initial fee, so when a prospective franchisee is comparing the costs of various franchises all of the initial fees should be taken into account.There is one guiding principle concerning the initial fee and that is that it should not, with the possible exception of very highly developed and successful franchises, contain any element of profit to the franchisor.