If you are looking at purchasing a franchise, it can be helpful to know at the outset the range of different fees you might be expected to pay. Below, we set out what franchise fees could potentially apply throughout your business’ lifecycle.
The franchisor charges franchisees these fees to have their legal team prepare the franchise agreement and disclosure document. Typically, the franchisor holds on to this money and charges for any changes or negotiations in addition to the preparation costs.
Initial Franchise Fee
The initial franchise fee is the amount the franchisor will charge you (the franchisee) to buy into the franchise.
Franchisors will usually charge a training fee to cover the cost of providing you with initial training in managing and operating the franchise. Sometimes this is included in the cost of the Initial Franchise Fee.
Site Selection Fee
If your franchise operates out of a particular location, such as a gym or a coffee shop, then the franchisor will usually assist you to find a suitable location for the franchise. This fee covers their assistance in locating, inspecting and assessing the suitability of the premises you propose. You will also pay this fee if you relocate your premises down the track.
Project Management or Supervision Fee
This fee covers the cost of the franchisor helping to design, plan, organise and oversee the fit out of the premises. Again, you usually pay this fee if you relocate your premises.
In different franchise relationships, this fee is called different things, such as an Administration Fee. It covers the cost of the franchisor allowing you to use their intellectual property, such as the branding and trademarks of the franchise. It also includes the cost of the franchisor providing you with ongoing advice and assistance in operating the franchise. This fee is usually paid via a set percentage amount and is paid monthly or weekly.
Opening Promotional Fee
This fee covers the cost of the franchisor helping to develop the opening promotional campaign for your franchise. Depending on the extent of the campaign, this is usually a few thousand dollars.
Local Marketing Contribution
The franchisor will require you to spend a particular amount each quarter on promoting and marketing your franchise. This is something you undertake, but the franchisor sets the minimum amount you need to spend. This fee is usually paid to the business that assists you with the advertising as required and is typically a percentage of the gross income each quarter.
Marketing Fund Contribution
The Marketing Fund Contribution is the amount the franchisor charges for marketing and promotional campaigns that they administer. Some franchisors don’t administer this kind of marketing and only require the Local Marketing Contribution.
This fee applies when the initial term of the franchise is coming to an end, and you wish to renew the franchise. You pay this fee when you submit your application to renew the franchise agreement, and the franchisor refunds the fee if they don’t grant you a renewal term.
The assignment or transfer fee is the amount the franchisor charges for you to be able to transfer the franchise to someone else. It is usually calculated as a percentage of the total price you sell or transfer your franchise for, and is paid when you apply to the franchisor for consent to transfer the franchise. The assignment or transfer fee is non-refundable.
Security Retention Amount
A Security Retention Amount is a fee you pay to the franchisor for them to hold onto when the franchise agreement ends in case any claims arise against your franchise. If unused after a given period, the franchisor typically reimburses the franchisee.
Although we have provided an outline of the different fees you can expect to pay as the franchisee, this doesn’t include the costs of running your business such as supply costs, employee salaries, utilities and rent, among others.
A franchise is a big commitment, and so it’s important that you understand the range of costs before you sign up. Importantly, the franchisor will set out in detail the costs involved in setting up and operating a franchise in the disclosure document, so ensure that you carefully review these amounts. If you any questions, get in touch with our franchise lawyers on 1300 544 755.