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If you are buying a franchise business, you can avoid having to pay any unexpected fees by asking the right questions throughout the purchase process and carefully reviewing the disclosure documentsThroughout both the application process and the franchise term, you should understand the different types of payments you will have to pay. These payments might include:

  • initial franchise fees
  • fit-out fees;
  • ongoing franchise fees; and
  • ancillary costs relating to your lease.

This article will explain what each of these fees means. 

Initial Franchise Fees

Once negotiations are underway, the franchisor will ask you to pay an initial franchise fee. 

The initial franchise fee is typically an upfront fixed fee. At the very least, this fee should cover the franchisor’s basic costs of providing you with:

Purchasing a franchise is a bit 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 you formally sign and return your franchise agreement and disclosure document.

Fit-Out Fees

The fit-out of your franchise includes any required:

  • equipment;
  • decor; or
  • branding.

No matter what type of franchise you are purchasing, you can better manage your budget by asking about any ‘fit-out’ fees which may apply to you. In some cases, you will 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 they 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. 

For example, the fit-out fees involved in buying a fast food restaurant franchise will typically be greater than those involved in buying a mobile food kiosk franchise. The restaurant would need to be fitted out according to your franchise agreement and you may incur costs from installing specific kitchen appliances, colour schemes and decor.

If your business requires significant costs to set up, your initial franchise fees will reflect these expenses.

Franchisor’s Legal Costs

Under the law, the franchisor may pass on their legal costs to you. This means that even before signing your franchise documents, the franchisor may pass on some of the legal costs they have incurred during the negotiation stage.

For example, a new franchisee will commonly pay the cost of having their legal documents prepared.

Asking the right questions at each stage of the purchase process can ensure that you are aware of any costs the franchisor may ask you to pay at a later date.

For example, you might ask to make a lump sum payment to the franchisor at the beginning of the franchise application process. This could be held in trust until you receive the franchise legal documents. If you do not do this, you could receive an unexpected invoice for this amount after you have bought the business. 

Ongoing Franchise Fees 

Once you have purchased your new franchise business and started trading, you will pay ongoing franchise fees. These fees are paid 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; and
  • administrative or IT fees.  

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 which is payable each week or each month. This type of ongoing fee is the easiest to budget for.

However, the franchisor will often charge ongoing fees in the form of a percentage of your revenue. By charging a percentage of your business’ total profit, the franchisor ensures that they also benefit from your business’ successes. 

Alternatively, the franchisor might charge a percentage of your business’ sales. This ensures that the franchisor can continue to rely on your ongoing contributions even if the business is generating low profit earnings. 

Some franchise businesses offer lower initial fees and rely on the future growth potential of their franchisees’ businesses under this model.

Ancillary Costs Related to the Lease

If you are purchasing a franchise with physical premises, your right to occupy and use these premises is likely to 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, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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