What are the initial fees?
In most franchises there is an initial franchise fee. This payment contributes to the training and support in getting started. The franchisor may also seek to recover some of the initial set-up costs.
If you feel as if you are paying too much as a franchisee, the following points might clarify things for you:
First of all, it could be said that the more well known and established a company and its brand, the more expensive the upfront initial costs might be.
Next, you should ask yourself whether the initial financial support is adequate to cover the following:
- Fit-out and stock
- Hiring staff
- Marketing the opening of the franchise
Once you have worked out these costs, you’ll want to work out how much it would have cost to set up your own business, and whether it is a viable venture given your level of knowledge and confidence in the industry. This will help you work out if there is value in the investment.
What are the ongoing fees?
The ‘ongoing’ franchise fee is paid on a regular basis and is dependent on the business’ revenue or sales after GST has been taken into account. It also varies depending on how shared responsibilities of the franchise relationship. The more involved the franchisor, the more expensive the fee may be. In some cases a ‘mark-up’ will discount the fee completely. Typically, the frequency and level of this fee will give an indication of the types of services offered by the franchisor. Both parties, prior to the commencement of the agreement, should agree to a set fee.
Important questions to ask as franchisee:
- What is the ongoing fee?
- How frequently is it paid?
- Is it a fixed-fee or percentage-based fee?
- Is this the market standard?
What does marketing cost?
The purpose of these fees is to market the business and generate clients. This is, more often than not, based on a percentage of the total sales, typically ranging from 1% to 5%.
The fees are normally collected into a fund that can be used on a regional or national scale.
If the franchise is relatively new, the franchisor might disregard any advertising fee, since the sales will still be quite low. While a national marketing campaign might not be as useful to a new, unknown franchisee, the franchisee is still expected to front some of the advertising fees in their local region.
What should the franchisee ask?
- What’s the fee and is it the same for other franchisees?
- Is this similar to other franchisors?
- What are you actually paying for?
- Does the franchisor have discretion on how it’s spent?
- Will this cost be beneficial overall?
What other costs are there?
Check with your franchisor to see which, if any, of the following additional expenses apply to your franchise:
- Exclusive territory fees; (securing your region)
- Annual fees; and
- Specification fees.
What else should you consider?
There are various other considerations that you should think about when setting up a franchise. If there duration is longer, you can expect the initial cost to be larger. On top of that, a higher initial fee could be indicative of a more established goodwill of the company. The fee might also be affected by the level of involvement of the franchisor in setting up the business. With renewals, extending a contract will incur this kind of fee. Remember, if your not being charged any ongoings, it’s probably because you’re being charged a mark-up. The ongoings are either fixed-fees charged weekly or monthly, or a percentage-based cut of revenue. When you pay your marketing fees, these might contribute to the network of franchisees as opposed to your particular branch. And lastly, ‘special’ fees can be charged for any additional training you and your staff might need (new systems of management or software etc.).
Do franchisees pay a deposit?
Sometimes a non–refundable deposit is paid by the franchisee. It is only non-refundable when the fee is quite small or the franchisee gets something (like an exclusive territory) for their money. Speak with a franchise solicitor before you pay any deposit and confirm with the franchisor that:
- Upon signing, the parties agree that the deposit goes towards partially paying for the initial start-up fee; and
- The exact details of whether or not the deposit is refundable.
Franchisees need to make sure they are not being exposed to any unnecessary fees, and that the fees they do pay are fair and justified. For more information on your rights as franchisee (or franchisor) contact LegalVision on 1300 544 755 to speak with a franchise lawyer, we will happily assist you!