Are you a new franchisor or franchisee? You need to understand how franchise fees are calculated. The first thing to know is that each franchise is different, so where one franchise may charge a fee, another might not. The method to calculate fees also varies between different franchises. Most franchise fees are calculated in the method set out below.
Franchise Fee Calculation Method
There are generally four ways of calculating a Franchisee Fee. These are:
- fixed fee;
- percentage of weekly or monthly revenue;
- a percentage of each particular item sold; or
- total percentage of profit.
Fixed fee is a fee that a Franchisee needs to pay the Franchisor every week or month. This does not vary from week to week or month to month based on variables in the business.
There is generally a provision that allows the Franchisor to change this amount regularly.
Percentage of Revenue Fee
Percentage of revenue is a very common fee. The percentage of revenue method means that the Franchisee needs to pay to the Franchisor an amount based on the amount of revenue (i.e. gross income) that the Franchisee is making. This flexibility can benefit the Franchisee, as if he/she is not making much revenue, then their fee is lower. If he/she makes more revenue, then the fee is higher. This method also assists a Franchisee to calculate product or service prices, to know what portion of the sale they should account for as cost.
Many franchises use this method when calculating other fees, such as marketing and administration fees.
Percentage of Item
This is more complicated than the methods discussed above. It is also not as common. It works similarly to the Percentage of Revenue method except that it applies on a per item basis rather than on weekly or monthly revenue. In most cases where a franchise uses this method, they also have a sophisticated corresponding Point of Sales system and calculations are done automatically. The main types of franchises which uses this method are one which have a low margin of profit.
Total Percentage of Profit
One of the least common methods of calculating a fee is the Total Percentage of Revenue Method. In this type of calculation method, there are generally no separate fees payable on the franchise. Rather, the total profit that the franchise makes is instead split between the Franchisee and the Franchisor. Generally this split is around the 40/60 to 50/50 mark. The advantage of this method is that it’s simple to calculate. It is generally not as popular as a Percentage of Revenue fee because it seems unattractive to many Franchisees.
If you are a Franchisor, we can assist you to decide and draft your fees. If you are a Franchisee, we can assist you to understand how the franchise fees are calculated. Get in touch today at 1300 544 755. The franchise legal team at LegalVision provides fixed-fee quotes and free consultations to all new clients!