The franchise fee gets your attention because it is usually the largest check you write on signing day. It may not be the fee that ultimately costs you the most.

I once worked with a franchisee who learned this lesson after the business was already operating. The franchise system had the usual collection of charges beyond the initial franchise fee, including royalties, marketing obligations, technology expenses, and other required costs. But the problem did not stop with the number of fees.

During the term of the franchise agreement, the franchisor attempted to increase certain fees multiple times.

Each increase may have appeared manageable when viewed by itself. Together, however, the increases changed the economics of the relationship. The franchisee had made the investment, signed the lease, hired employees, and built a business around one set of financial assumptions. The franchisor retained contractual flexibility to impose higher costs after the franchisee was committed and had far fewer practical options.

That experience illustrates one of the most overlooked risks in buying a franchise. Prospective franchisees understandably focus on how much it costs to open. The better question is how much the franchisor can require them to pay over the entire life of the agreement.

A Franchise Can Have Strong Sales and Still Be a Poor Investment

Gross sales are easy to celebrate. Profit is what pays the owner.

Suppose a franchise location produces $1 million in annual sales. That number may sound impressive. But revenue must cover labor, rent, inventory, utilities, insurance, debt payments, taxes, and the full collection of fees imposed by the franchise system. A royalty of 6 percent removes $60,000 before many of the franchisee’s other expenses are paid. Add a marketing contribution, local advertising requirement, technology charges, required software, training expenses, delivery commissions, and supplier costs, and the margin can narrow quickly.

This is why a financial performance representation based primarily on gross sales can provide an incomplete picture. A prospective franchisee needs to understand not only what a typical location may generate, but what remains after the cost of generating it.

The franchise fee is the price of admission. The continuing charges determine whether the business can provide an acceptable return.

Read Item 6 as a Whole

Item 6 of the Franchise Disclosure Document identifies other fees a franchisee may be required to pay. Many prospective franchisees review the table one line at a time. That is a mistake.

The fees need to be examined together because they are paid from the same business. A 6 percent royalty, 2 percent marketing contribution, 1 percent local advertising obligation, and several smaller technology and administrative charges do not operate independently. Collectively, they may consume a significant percentage of revenue before ordinary operating expenses are considered.

The review should also extend beyond the amounts listed in the fee column. Pay attention to:

• Whether a fee is fixed or can be increased
• Whether the agreement establishes a maximum increase
• How frequently an increase may occur
• Whether the franchisor has discretion to create additional fees
• Whether costs may be imposed through the operating manual
• Whether the franchisee must pay the franchisor’s then-current rates
• Whether a third-party vendor can change its pricing without limitation

A fee disclosed at $250 per month may look insignificant in a spreadsheet. If the franchisor can increase it without a meaningful cap, its present amount does not reveal the franchisee’s long-term exposure.

Technology Fees Can Become a Moving Target

Technology is necessary in modern franchise systems. Point-of-sale platforms, customer apps, loyalty programs, cybersecurity services, scheduling systems, data analytics, online ordering, and artificial intelligence tools can help a franchise remain competitive.

The question is not whether the system should evolve. The question is who decides what technology is required, who selects the vendor, who benefits from the arrangement, and who bears the cost.

Many franchise agreements give the franchisor broad authority to require new technology throughout the term. The operating manual may provide additional requirements that can be changed without amending the franchise agreement. As a result, the technology package described when the franchise is purchased may bear little resemblance to the package required five or ten years later.

Before signing, determine whether technology charges are capped, whether major replacements are anticipated, and whether the franchisor may require additional platforms at the franchisee’s expense. Ask existing franchisees how often the system has changed and what those changes actually cost.

Required Vendors May Carry Costs You Cannot Control

Consistency is a legitimate part of franchising. A franchisor needs the ability to establish quality standards and protect the brand. That does not mean the economics of required purchasing should escape scrutiny.

A franchisee may be required to buy inventory, equipment, uniforms, ingredients, insurance, software, or services from the franchisor or an approved supplier. Even when the direct fee appears reasonable, the required product or service may cost more than a comparable alternative.

The FDD should be reviewed to determine whether the franchisor or its affiliates receive rebates, commissions, or other revenue from required purchases. Prospective franchisees should also ask:

• Can additional approved suppliers be proposed?
• What happens if the required supplier raises its prices?
• Does the franchisor have an obligation to consider comparable alternatives?
• Is the franchisee responsible for freight, installation, support, or replacement costs?
• Does the franchisor profit from the required purchasing arrangement?

A payment does not need to be labeled a franchise fee to reduce the franchisee’s return.

Marketing Charges Deserve More Than a Percentage Review

Franchisees often assume that a national marketing contribution will directly promote their location. The agreement may promise much less.

The franchisor may retain broad discretion over how the marketing fund is spent. Money may be used for brand development, administrative expenses, agency fees, creative work, or campaigns that provide little measurable benefit in the franchisee’s market. The agreement may not require the franchisor to spend contributions in proportion to where they were collected.

Local advertising obligations can add another layer. A franchisee may be required to contribute to the national fund, spend an additional percentage locally, participate in regional cooperatives, and fund promotions or discounts mandated by the franchisor.

The right question is not simply, “What is the marketing fee?” It is, “What is my total required marketing expenditure, how can it change, and what control or reporting will I receive?”

Remodeling and System Changes Can Arrive Before the Investment Is Recovered

A franchise location that looks current today may not remain acceptable to the franchisor throughout a ten-year term. Franchise agreements commonly allow the franchisor to require remodeling, new signage, updated equipment, revised décor, or an entirely new brand image.

These requirements may cost tens or hundreds of thousands of dollars. They may also arrive before the franchisee has recovered the original investment or shortly before renewal, when the owner must decide whether to invest more money to remain in the system.

Review the agreement for spending caps, frequency limitations, advance notice, and exceptions for locations that recently opened or remodeled. If the agreement contains no meaningful limitations, include reasonable future capital expenditures in the financial model.

Delivery Platforms and Discounts Can Increase Sales While Reducing Profit

Systemwide promotions and third-party delivery platforms may produce additional revenue. They do not necessarily produce additional profit.

A franchisee may pay delivery commissions, credit card charges, technology expenses, and royalties on the full sale while also absorbing part of a customer discount. A promotion that drives traffic can still harm the franchisee if the unit-level economics do not work.

Prospective franchisees should determine who controls pricing, whether participation in promotions is mandatory, how royalties are calculated on discounted transactions, and whether the franchisor receives any separate benefit from a platform or vendor.

More sales do not solve a margin problem when the franchisee loses money on each additional transaction.

Model the Business Under Less Favorable Assumptions

The financial model should not assume that every fee remains at its opening-day amount.

Prepare alternative projections that account for higher technology charges, increased labor and product costs, required remodeling, additional marketing obligations, and slower-than-expected sales. Determine what happens if system fees increase by one or two percentage points in the aggregate. A small percentage of gross sales can represent a substantial portion of the owner’s remaining profit.

An accountant experienced with franchise businesses can help test the unit economics. Existing and former franchisees can provide equally valuable context. Ask them not only about revenue, but about unexpected costs, recent fee increases, required vendors, technology changes, and whether their profit margins have improved or declined.

Negotiate the Ability to Increase Fees

Franchisors are often reluctant to reduce royalties or eliminate standard fees. There may still be room to negotiate protections against future increases.

Depending on the system and the franchisee’s leverage, possible protections include:

• A fixed dollar or percentage cap
• A limit tied to the Consumer Price Index
• Restrictions on how frequently a fee may increase
• Advance written notice of an increase
• A cap on required capital improvements during the initial term
• Protection against new categories of fees
• A right to review material changes before they take effect
• Grandfathering negotiated fee terms through renewal

Even if the franchisor rejects a proposed change, the discussion reveals how it views its authority. A franchisor that insists on unlimited flexibility to increase charges is providing information a prospective franchisee should consider before investing.

The Question to Ask Before Signing

Prospective franchisees often ask, “How much does this franchise cost?”

Another question needs to be asked:

How much can the franchisor require me to spend after I have committed my capital and no longer have an easy way to leave?

The initial franchise fee matters. So do royalties, advertising contributions, technology expenses, supplier costs, remodeling requirements, mandatory promotions, and every provision that allows those obligations to change.

The franchisee I described did not face a single surprising charge. The larger problem was a contract that gave the franchisor repeated opportunities to change the financial bargain after the investment had been made.

A franchise agreement cannot eliminate every future expense. It should allow a prospective owner to understand the risk, measure the likely return, and decide whether the franchisor’s flexibility is commercially reasonable.

The best time to examine that flexibility is before the agreement is signed, the lease is executed, and the franchisee’s bargaining power has shifted.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney based in West Des Moines, Iowa with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.