People often ask us about types of fees and payments that franchisees typically must make under franchise agreements. The financial aspects of the business are obviously critical (the reason everyone buys a franchise is to make money) and it is therefore important to understand the payments you must make.
Initial franchise fee
Most franchise systems require the payment of an initial franchise fee. This fee is usually paid upon execution of the Franchise Agreement. The initial fee is a payment for the right to join the network and to use the franchisor’s system and name.
How much would that upfront fee be? Is it the same for all franchises?
The amount of the upfront fee will vary from one franchise system to another. Some charge as little as a few thousand dollars and others charge tens of thousands of dollars. The key is to check what is included in your franchise fee and what is charged as an additional expense. When comparing initial fees charged by different franchise systems, it is important that you compare ‘like with like’.
Some initial fees include training fees, initial supply of stock, equipment, uniforms and stationery. You need to look carefully at what is included and what additional payments you will be required to make. The lowest initial franchise fee is not always the best, and a higher franchise fee can sometimes provide better value. You must be very clear about what is included in the initial fee.
Most Franchise Agreements provide for continuing franchise fees to be paid, either as a percentage of turnover or as a fixed amount. These are mostly payable weekly or monthly and are usually called either ‘royalty’ fees or ‘service’ fees. In addition, you may be required to contribute to a central advertising and marketing fund.
Which is better for fees – paying a percentage of turnover or a fixed amount?
The manner in which the ongoing fees are calculated will vary from one franchise system to another. Turnover fees have the benefit of reducing what you must pay when business is slow (for example, in the start-up phase of a new business) but you then pay more when the business is booming. Flat fees give the advantage of consistency in that you know how much the fees will be every month and you can more easily budget for what you must pay.
Both methods have their advantages and disadvantages.
How we can help
As with any commercial contract, it is important to obtain specialist advice regarding the content of the franchise agreement and related documents. Clients are referred to us because of our experience in the franchising industry and our commercial and pragmatic approach to helping our clients.
Adapted from an Article by Peter McLaughlin and Lucas Hewlett, redchip lawyers
This article is a summary of a chapter from “Buying your Franchise”, book 1 in the ‘Shaking the Profits from Franchising’ book series. Visit the redchip lawyers website for more details.