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Costs to Consider Before Franchising Your Business

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If you are a successful business owner considering franchising, there are a few costs you must keep in mind. For instance, as a franchisor, you will likely incur some legal fees to begin franchising your business. You may be able to offset some of these costs through fees your franchisee will pay. However, the Franchising Code of Conduct (‘the Franchising Code’) limits the overall amount you can recuperate.

This article explains some franchise costs that you may incur and specific fees you can charge franchisees once they sign the franchise agreement.

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Franchisor’s Costs

Firstly, there is no franchise registration or approval process for beginning a franchise. Instead, establishing a franchise requires the franchisor to fulfil specific documentation that often entails legal costs. As a result, many business owners will retain lawyers to assist in drafting and reviewing important franchise documents, including: 

  • the franchise agreement, which is a contract that solidifies both you and your franchisee’s legal rights and obligations;
  • the disclosure document, which helps inform prospective and current franchisees about the operation of the franchise;
  • applications to register any business names or logos as trademarks; and
  • licence and distribution arrangements for the franchisee’s use of your business’s intellectual property.

If you have yet to register your business’ trademarks, you will incur further costs to apply with IP Australia. Furthermore, the filing fees are separate from any legal fees you pay for advice and drafting of your trade mark application.

Furthermore, the costs for drafting and reviewing these documents will vary depending on which law firm you retain. 

Franchisee’s Costs

Under the Franchising Code, there are some ways you can recoup specific costs you may incur before franchising your business. However, the Code does place limitations on the amount that you can recoup.

Legal Costs

As of 1 July 2021, the Franchising Code prevents you from recovering all (or at least part) of the costs of legal services for documents relating to the franchise agreement. This includes the drafting and administering of:

  • breach notices, which inform the franchisee that they are in breach of the agreement;
  • termination notices, which inform the franchisee that you intend to terminate the agreement; and
  • renewal documents, which facilitate renewal terms.

Ultimately, this rule attempts to prevent franchisors from exposing franchisees to future unquantifiable legal costs at the time of entering the franchise agreement.

However, there is an exception to this rule. That is, it may be permissible under the Code to recoup a fixed documentation fee if your franchisee pays it before starting the franchised business. Generally, the documentation fee covers the costs of preparing, negotiating or executing the franchise agreement. 

Initial Fees

Typically, franchisors will charge a lump sum that franchisees must pay upon signing the franchise agreement. Moreover, this fee often covers the basic costs of providing your franchisees with:

  • training;
  • system support; and
  • marketing materials.

Moreover, depending on the terms within your franchise agreement, franchisees can bear the costs of fitting out the business premises. The fit-out of a franchise business includes any necessary:

  • equipment;
  • furniture; or
  • branding.

Furthermore, if the franchise business requires high costs to set up, the initial franchise fees you charge should reflect these expenses.

Ongoing Franchise Fees 

In addition, the costs that come with managing a franchise network do not stop at initial fees. Instead, there are ongoing franchise fees that franchisors typically charge their franchisees. Often, franchisees will pay these fees in exchange for:

Further, you may charge ongoing fees in either a:

  • fixed-fee payment; 
  • percentage of the franchisee’s sales;
  • percentage of your franchisee’s profit; or
  • combination of these methods.

In contrast to a fixed-fee structure, you can benefit from the business’ successes when charging a percentage of a franchise business’s profit. Alternatively, charging a percentage of a franchise business’ sales means you can continue to rely on their contributions. Further, you can do so even if the business generates low-profit earnings.

Marketing Fee

As a business owner, you should understand how critical marketing and advertising is to the success of your business. Often, many franchisors who undertake marketing activities on behalf of their franchises will typically set up a marketing fund. Moreover, this fund is where franchisors collect a certain amount of money from their franchisees to contribute to marketing activities. These activities may include:

  • promotions; 
  • social media campaigns; and 
  • website management.
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Key Takeaways

In short, the main costs you will likely incur when beginning a franchise are legal fees. These include fees for drafting and reviewing:

  • the franchise agreement;
  • the disclosure document;
  • applications to register any of your business’ trademarks; and
  • any licence and distribution arrangements for the franchisee’s use of your business’s intellectual property.

While you can recuperate some of these costs by charging your franchisees fees, the Franchising Code restricts what you can recover. If you have any questions about the costs of franchising your business, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is an initial franchise fee?

The initial franchise fee is typically an upfront fixed fee that franchisors charge franchisees. The initial franchise fee typically covers the franchisor’s basic costs of providing their franchisees with training, support, and marketing materials.

Can I charge my franchisee my legal fees relating to the franchise agreement?

As of 1 July 2021, the Code prevents you from recovering all or part of the costs of legal services for documents ‘relating to the agreement’ from franchisees.

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