How are Franchising Fees Calculated?

Franchise fees vary between franchises. There are often discrepancies between:

• what franchisors will expect their franchisees to pay; and
• the process for the calculation of fees.

Franchisors will generally request payment for allowing you to use their intellectual property and branding, as well as a fee for their assistance to operate the franchise. As a franchisee, you can also expect to pay the initial franchise purchase fee, administrative expenses and marketing fees. This article will describe four common ways to calculate franchise fees, including:

1. fixed fee;
2. a percentage of the weekly or monthly revenue;
3. a percentage of items sold; or
4. the total percentage of the profit.

1. Fixed Fee

A fixed fee is a set amount that a franchisee is required to pay on a weekly or monthly basis, irrespective of the performance of the franchise business.  For example, $100 per week. The franchise agreement may allow the franchisor to alter the set amount at different points of the franchise term.

A fixed fee method of calculating fees can be beneficial to both the franchisee and the franchisor, as it provides certainty when making business decisions and financial plans.

2. Percentage of Weekly or Monthly Revenue

Another common way to calculate franchise fees involves a franchisee paying a percentage of the revenue (the gross income) that the franchisee makes. This type of calculation can be beneficial for the franchisee, as it ensures that the fees they pay are relative to the success of the business.

So, if the business is not making much money at any given time, the percentage taken in fees is lower. Conversely, when the franchise is doing well, the percentage is higher.

3. Percentage of Items Sold

This fee involves taking a percentage of the profit for particular items sold by the franchise. Typically, calculating fees in this way is beneficial when the predicted profit margin of the franchise is low.

Some of our franchising clients, such as Just Cuts, have found that this model motivates the franchisees to sell more of the products as they are directly tied to the fee.

4. Total Percentage of Profit

Finally, franchise fees can also be calculated by splitting the total profit of the franchise between the franchise and the franchisor.

While this method is simple to calculate, it is rarely used. Ultimately, this is because it is less attractive from the franchisee’s perspective.

Additional Fees

Some other fees you can expect to pay as a franchisee include:

• an initial upfront payment when entering the franchise agreement. This amount can vary depending on the franchise system;
• training fees for the operation of the franchise. Generally, the initial upfront payment will cover the initial training fees. However, any ongoing training is usually provided at the franchisee’s expense;
• marketing fees. As a franchisee, you may need to contribute towards a marketing fund on an ongoing basis; and
• leasing or licensing fees for the premises of the franchise.

Key Takeaways

As a potential franchisee, it is essential to understand the types of fees that you will be paying, as well as the calculation methods of these fees. Methods of calculation vary, mainly depending on the kind of franchise.

When entering into a franchise, ensure you have undertaken due diligence and assessed whether the franchise fees are affordable, providing your franchise with the best chance of success. If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.