If you are buying a franchise business, you can avoid paying any unexpected fees by asking the right questions during the purchase process and carefully reviewing the disclosure documents. Throughout the application process and the franchise term, you should understand the different types of payments you must pay. These payments might include:
- initial franchise fees;
- fit-out fees;
- ongoing franchise fees; and
- ancillary costs relating to your lease.
This article will discuss what each of these fees means.
Initial Franchise Fees
Once negotiations are underway, the franchisor will typically ask you to pay an initial franchise fee.
The initial franchise fee is typically fixed upfront. At the very least, this fee should cover the franchisor’s basic costs of providing you with:
- basic training;
- system support; and
- marketing materials.
Purchasing a franchise is like purchasing a ‘business in a box’. Because of the convenience of starting a business like this, the franchisor may also include a profit margin on the initial costs you pay.
You should expect to pay the initial franchise fee after formally signing and returning your franchise agreement and disclosure document. However, be aware that even after formally entering into a franchise agreement, the Franchising Code of Conduct (the Code) provides you with a 14-day cooling off period in which you are able to terminate the agreement. If you choose to terminate the agreement within this period, the franchisor must repay all payments made by you in connection with the agreement within 14 days, less their reasonable expenses.
Fit-Out and Equipment Fees
The fit-out of your franchise includes any required:
- equipment;
- decor; or
- branding.
No matter what type of franchise you purchase, you can better manage your budget by asking about any ‘fit-out’ fees and expenses that may apply to you. You will sometimes be responsible for the fit-out as the franchisee. However, the franchisor is typically involved in completing the fit-out.
The fit-out fees are often non-negotiable and will be set out in the disclosure document you receive from the franchisor.
The details of these fees will depend on the type of franchise you are purchasing.
If your business requires high setup costs, your initial franchise fees will reflect these expenses.
Continue reading this article below the formFranchisor’s Legal Costs
One recent change to franchise fees concerns the franchisor’s legal costs. Following the 2021 amendments to the Code, a franchisor must not enter into a franchise agreement that has the effect of requiring the franchisee to pay all or part of the franchisor’s costs of legal services for documents ‘relating to the agreement’. Examples of documents which would seem to fit within this criteria include:
- breach notices;
- termination notices; and
- renewal documents.
This represents a significant change from the prior position wherein franchisors could pass on their legal costs to franchisees. Franchisors can also not insert a clause into the franchise agreement stating that franchisees must pay for the franchisor’s costs related to settling a dispute.
However, franchisors can still pass on some legal costs to franchisors provided that these costs:
- arise from preparing, negotiating and executing the franchise agreement;
- these costs are specified in the franchise agreement as being for this purpose; and
- they don’t include any amount for legal costs which arise after the agreement is entered into.
Ongoing Franchise Fees
Once you have purchased your new franchise business and started trading, you will pay ongoing franchise fees. You will typically pay these fees in exchange for:
- the support you receive from the franchisor; and
- operating under the franchisor’s brand.
The franchisor will charge a combination of fees that might include:
- royalties;
- advertising or marketing fees;
- administrative or IT fees;
- lead referral fees; and
- assignment fees.
Furthermore, the franchisor may apply these fees in either a:
- fixed-fee payment;
- percentage of your sales;
- percentage of your profit; or
- combination of the above methods.
The simplest method for a franchisor to charge ongoing fees is to have a fixed fee payable weekly or monthly. This type of ongoing fee is the easiest to budget for. However, the franchisor will often charge ongoing fees as a percentage of your revenue. By charging a percentage of your business’s total profit, the franchisor ensures they also benefit from your business’s successes.
Alternatively, the franchisor might charge a percentage of your business’ sales. This ensures that the franchisor can continue to rely on your contributions even if the business generates low-profit earnings.
Some franchise businesses offer lower initial fees and rely on the future growth potential of their franchisees’ businesses under this model.
Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.
This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.
Potential Fees
In addition to the fees you will have to pay, additional fees may become payable in the event of certain events. These include:
- renewal fees that are payable on the renewal of the franchise; and
- assignment fees that are payable in the event of a transfer or sale of your franchised business.
Ancillary Costs Related to the Lease
If you purchase a franchise with physical premises, your right to occupy and use these premises will likely involve additional costs. Depending on the leasing arrangements for your business, you may pay these costs as a licence fee. When purchasing a new franchise, it is common for the franchisor to assist you with lease negotiations and enter the lease with the landlord themselves.
Key Takeaways
Running a franchise business includes paying fees to the franchisor. These fees might include:
- initial franchise fees;
- fit-out fees;
- ongoing franchise fees; and
- ancillary costs.
If you have any questions about the fees detailed in your franchise disclosure document, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Franchisors can only make franchisees pay for their legal costs where the costs related to preparing, negotiating and executing the franchise agreement are not related to costs arising after entering the agreement.
As a franchisee, you will likely have to pay some ongoing fees weekly or monthly. Some of these potential fees include royalties, advertising or marketing fees, and administrative or IT fees.
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