In Short
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Franchise fees vary widely and include initial fees, ongoing royalties, and additional charges like training, equipment, and marketing levies.
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Ongoing fees are commonly calculated as fixed amounts, a percentage of revenue, or a combination of both to balance franchisor income and franchisee performance.
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Clear disclosure of all fees in the franchise agreement and disclosure document is essential to help franchisees make informed decisions.
Tips for Businesses
Understand all franchise fees before signing—ask about upfront costs, ongoing royalties, and any extra charges like training or equipment. Check how fees are calculated and negotiate terms that fit your budget and growth plans. Always review disclosure documents carefully and seek expert advice to avoid surprises.
Franchise fees are an integral part of any franchise business. Both franchisees and franchisors should know how franchise fees are calculated. However, there is no stock-standard way of calculating fees. Every business and franchise network is different, and so is how they calculate franchise fees. Therefore, each franchise network will charge different fees. This article will cover the common types of franchise fees and the various calculation methods.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Initial Franchise Fee
If you purchase a franchise, your main upfront cost is the initial franchise fee. This is typically paid as a lump sum at the commencement of the franchise relationship. The initial payment can vary widely depending on the franchise system’s reputation, market position, and the level of support provided. You may also hear this referred to as the ‘purchase fee’. It will cover some of the franchisor’s costs in developing the franchise, including:
- the costs of recruiting and assessing prospective franchisees;
- marketing materials;
- ongoing support; and
- royalties for the use of intellectual property.
The total amount of the initial franchise fee will typically vary depending on how well-established the franchise is. While there is no standard amount, initial franchise fees can vary from a few thousand dollars for newer or smaller franchises to several hundred thousand for well-established, high-profile brands. However, the fee should reflect the nature of the franchise and the franchisor’s costs of granting a franchise. That said, the initial franchise fee should also be appealing to prospective franchisees. Alternatively, the fee should at least not be excessive enough to deter potential franchisees.
Training Fee
In addition to the initial setup fees, most franchisors will also charge a training fee. This is sometimes included in the initial franchise fee. Many franchisors require new franchisees and managers to attend a week-long orientation training session. Often, this training will be at the franchise head office. Therefore, the training fee will cover this program. However, there may be additional expenses for:
- travel;
- accommodation;
- meals; and
- the costs of any training provided by external third parties other than the franchisor.
The franchisor may also impose an ongoing training fee. These fees might be charged periodically (e.g., annually) to cover refresher courses, updates on new products or procedures, or advanced training programmes. Ongoing training fees can be structured as fixed amounts or as a percentage of revenue, depending on the franchise system.
Continue reading this article below the formDocumentation Fee
You, as the franchisor, will likely incur legal costs in the process of granting a franchise. You will likely need a lawyer to draft the franchise agreement and other key franchise documents.
Under the Franchising Code of Conduct, you can only pass select legal costs onto your franchisees. These costs must only relate to the preparation, negotiation or execution of the franchise agreement. You must specify these costs in the franchise agreement. Further, when preparing the agreement, you must state that these costs directly relate to your legal expenses. This fee is often termed a documentation fee. This amount will vary depending on the complexity of drafting the agreement and your legal expenses.
Equipment Fees
As the franchisee, you may be charged for any initial equipment or stock required for the business’s operation. This will depend on the nature of the franchise you have bought. This equipment may be provided to you directly by your franchisor.
However, your franchise agreement or disclosure document may specify the equipment you need to purchase. Often, you can only buy this equipment or stock from a list of approved suppliers. Similarly, you will likely find this list in either your franchise agreement or disclosure document. For example, suppose the business is a mobile franchise. Your franchisor might include a fee option for purchasing a van or the tools required for the business.
Other Upfront Fees
The following fees are extra services a franchisor may offer as part of the franchise setup.
| Upfront Fee | Service |
|---|---|
| Site Selection Fee | This fee is typically paid to the franchisor in consideration of the franchisor’s assistance in finding and locating suitable premises for the franchisee. |
| Project Management Fee | This fee is typically paid to the franchisor in consideration for the franchisor providing support to the franchisee in managing the fit-out of the premises and assisting in designing the floor plan. |
| Opening Promotion Campaign Fee | This fee is typically paid in consideration of the franchisor assisting the franchisee in developing and launching the marketing campaign for the new franchise before launch. The amount of this fee will depend on the level of marketing and how involved the franchisor is in determining the content and strategy behind the opening promotional campaign. |
Ongoing Franchise Fees
Beyond the initial and upfront fees, there are also ongoing franchise fees. These fees cover the continuing right to use the intellectual property and business system and be part of the franchise network. Typically, these ongoing fees will include a royalty fee, a technology fee, and a marketing fee. There are several calculation methods for these fees. However, the three most common franchise fee calculation methods include:
- fixed fees;
- percentage of revenue; or
- a combination of fixed and percentage-based.
Fixed Fee
A fixed fee is a set fee that a franchisee must pay, typically weekly or monthly. These are set beforehand and do not vary weekly or month to month. Additionally, they are not dependent on the variable success of the business.
This fee type can be helpful when franchisors are expanding and are concerned about the success of a new franchise. This will guarantee income rather than being dependent on the franchise’s takings. It is also easier to measure and does not require regular sales audits.
Percentage of Revenue Fee
The percentage of revenue is a prevalent method of calculating the ongoing royalty fee. The percentage of revenue calculation method means that the franchisee needs to pay the franchisor an amount based on the revenue or gross income the franchisee is making before taxes.
The variability of this method can benefit the franchisee if they are not making much revenue, then their monthly fee will be lower. However, the fee will be higher if the franchisee makes higher revenue. This method also helps franchisees calculate the prices of products or services, knowing what portion of the sale they should account for to cover franchise fees and running costs.
However, the downside of this fee calculation method is that the revenue can be difficult to measure if the franchise does not have a central system to record sales. This can also create issues where most sales are completed in cash.
Fixed Fee and Percentage-Based Combination
Fixed fees can sometimes be challenging for franchisees, especially during economic downturns, seasonal fluctuations, or when they are just starting their business.
One common approach is an “either/or” model, where the franchisee pays a fixed amount or a percentage of revenue, whichever is higher. For instance, a retail franchise might structure its fee as “the higher of $500 per week or 5% of gross revenue.”
This model ensures a minimum income for the franchisor while allowing franchisees to benefit during periods of strong performance. It also protects franchisees during slower periods, as they will not pay a high percentage on low revenues. This type of structure aims to balance the franchisor’s need for stable income with a model that aligns more closely with the franchisee’s actual performance.
Marketing Levy
If a franchisor chooses to operate a marketing fund, the marketing levy will be the most critical ongoing franchise fees. These monies are paid into the marketing fund, an account held and controlled by the franchisor to market the franchise network. The funds will typically be used for national marketing campaigns and associated expenses to promote the franchise network and attract more customers. The franchisor will need to specify the specific purposes for which the marketing levy is being used in their marketing fund report contained in the disclosure document, which must be prepared each financial year.
Other Ongoing Fees
The following fees are additional ongoing fees a franchisor may charge.
| Ongoing Fee | Service |
|---|---|
| Software Fee | The management fee is generally for the franchisor’s ongoing support and guidance in franchise operations. It may also cover the use of the franchisor’s intellectual property. |
| Management Fee | Some franchisors will provide employment and HR support to franchisees to help them manage their employees by the Fair Work requirements. |
| HR Fee | Suppose a franchisor chooses to provide a franchisee with ongoing training (potentially because the franchisee is struggling to meet the necessary performance criteria). In that case, the franchise agreement will often specify that the franchisor can pass on the costs of this training to the franchisee. |
| Ongoing Training Fee | Suppose a franchisor provides a franchisee with ongoing training (potentially because the franchisee struggles to meet the necessary performance criteria). In that case, the franchise agreement will often specify that the franchisor can pass the training costs to the franchisee. |
Franchise Fees Upon or Renewal or Sale of the Franchise
When a franchise agreement ends and both franchisor and franchisee have elected to renew the franchise for another term, it is common for the franchisee to be charged a renewal fee. This fee effectively acts as a second initial franchise fee, although it will usually be lower than the initial franchise fee for the first term.
Alternatively, if the franchisee chooses to sell the franchise to a new franchisee during the term of the franchise agreement, the franchise agreement may contain an assignment fee. This fee will entitle the franchisor to a sum upon the transfer of the business, which will either be a fixed amount or a percentage of the price that the franchise is sold for.
Disclosure Requirements
Franchisors must disclose particular information about the franchise network to new and existing franchisees per the Franchising Code of Conduct, including any fees the franchisee will incur. This information must be provided in a disclosure document. This document will need to set out the setup costs of the franchise and the ongoing fees for the business.
This information allows prospective franchisees to make informed decisions about the franchise business before entering into the franchise agreement. Consequently, the accuracy of the information provided in the disclosure document is critical and failure to update and provide a current version of the disclosure document to prospective franchisees is taken very seriously.
Key Takeaways
As a Franchisor:
- there are no stock-standard franchise fees, and these vary from franchise to franchise and should be based on the nature of your business;
- you should consider the different methods of calculating ongoing fees and consider which model would work best for your business; and
- you must ensure that all fees are outlined in your disclosure document, which needs to be updated annually.
As with any business decision, you should seek professional advice from an accountant, franchise consultant and lawyer.
If you are a franchisor or a franchisee and need assistance with reviewing or preparing your franchise agreement and disclosure document, contact our experienced franchise lawyers 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
How can I structure fees to incentivise franchisee performance and growth?
As a franchisor, you can structure fees to motivate franchisee performance by implementing tiered royalty rates based on sales targets. You might offer reduced rates for franchisees who exceed certain revenue thresholds or provide fee rebates for achieving specific growth milestones. Consider incorporating performance-based marketing fund contributions, where high-performing franchisees contribute less.
You could also introduce temporary fee reductions for franchisees who open additional units, thereby encouraging multi-unit ownership. By aligning fee structures with franchisee success, you create a win-win situation that promotes system-wide growth and fosters a culture of achievement within your franchise network. Always consult with financial, legal, and accounting professionals before making these decisions.
How might emerging technologies or business models in franchising affect traditional fee structures?
Emerging technologies and business models in franchising could significantly impact traditional fee structures. You may need to consider adapting your fee model to accommodate e-commerce sales, which might blur territorial boundaries. Digital marketing and AI-driven customer insights could lead to more sophisticated, performance-based marketing fees. Cloud-based management systems could replace traditional software fees with subscription models. The rise of ‘ghost kitchens’ or virtual brands might necessitate new fee structures for franchisees operating without physical storefronts. As data becomes increasingly valuable, you might explore ways to monetise system-wide data insights, potentially offsetting other fees for franchisees.
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