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Franchise fees are an integral part of any franchise business. Both franchisees and franchisors should have a good understanding of 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 types of franchise fees and the different calculation methods.

Initial Franchise Fees

The initial franchise fee can sometimes be called a purchase fee. It will cover some of the franchisor’s costs developing the franchise, including: 

  • marketing materials; 
  • ongoing support;
  • royalties for the use of intellectual property; and 
  • location and lease negotiations. 

These fees might also cover some initial equipment or stock required for the operation of the business. For example, if the business is a mobile franchise, franchisors might include a fee option for the purchase of a van or tools required for the business.

These will typically vary depending on how well established the franchise is. This amount should be attractive for prospective franchisees.

Training Fee

In addition to the initial setup fees, most franchisors will also charge a training fee. Many franchisors require new franchisees and managers to attend an initial week-long orientation training session. Often this training will be held at the location franchise head office. Therefore, the training fee will cover this program. However, there may be additional expenses for: 

  • travel; 
  • accommodation; and 
  • meals. 

The franchisor may give an estimate of these additional costs, but they may change.

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

The franchisor will provide the new franchisee with assistance to find and locate suitable premises for the new franchise. In addition, the franchisor will typically help with inspecting the premises and assessing their suitability.

Project Management Fee

This fee is paid to the franchisor to provide support managing the fit-out of the premises. The franchisor will help design the floor plan and oversee the fit-out process.

Opening Promotion Campaign Fee

The franchisor will help the franchisee develop and launch the marketing campaign for the new franchise prior to launch.

Ongoing Franchise Fees

Beyond the initial and upfront fees, there are also ongoing franchise fees. These fees are to cover the ongoing right to use the intellectual property and business system and be part of the franchise network. There are a number of calculation methods for these fees. However, the three most common franchise fee calculation methods include:

  1. fixed fees;
  2. percentage of revenue; or
  3. a combination of fixed and percentage-based.

Fixed Fee

A fixed fee is a set fee that must be paid by a franchisor on a weekly or monthly basis. These are set beforehand and do not vary week to week, or month to month. Additionally, they are not dependent on the variable of the business.

Note, your franchise agreement can be tailored, so that the franchise fees can be increased or decreased regularly.

This fee type can be useful where 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 also is easier to measure and does not require regular audits of sales.

Percentage of Revenue Fee

Percentage of revenue is a very common fee. The percentage of revenue calculation method means that the franchisee needs to pay the franchisor an amount based on the amount of revenue or gross income that the franchisee is making before taxes. 

The variability of this method is beneficial for the franchisee. If they are not making much revenue, then their fee for that month will be lower. If they are making higher revenue, then the fee will be higher. 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.

Many franchises use this method when calculating other fees, such as marketing and administration fees.

However, the downside of this method of fee calculation is that if the franchise does not have a central system to record sales, the revenue can be difficult to measure. This can also create issues where the bulk of sales are completed in cash.

Marketing Levy

One of the most important ongoing franchise fees is the marketing levy. These monies are paid into a marketing fund which is an account held and controlled by the franchisor. The funds will be used to pay for national marketing campaigns and associated expenses, to promote the franchise network and attract more customers.

Franchise agreements may also contain specific terms about local marketing campaigns. These could be a monthly or quarterly fee that a franchisee must pay to market in their territory and the local areas. This fee could be a proportion of the franchisee’s revenue or a fixed-sum.

Other Ongoing Fees

The following fees are additional ongoing fees a franchisor may charge.

Ongoing Fee

Service

Software Fee

These fees will cover the software required to operate the franchise. They may be for software developed and owned by a third party or owned and designed by the franchisor.

Management Fee

The management fee is for the franchisor’s ongoing support and guidance in operating the franchise. It may also cover use of the franchisor’s intellectual property.

HR Fee

Some franchisor’s will provide employment and HR support to franchisees to help them manage their employees in accordance with the Fair Work requirements. 

Disclosure Requirements

Franchisors are required to disclose particular information about the franchise network to new and existing franchisees in accordance with the Franchising Code of Conduct. 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. 

The purpose of this information is to allow 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

Franchise fees vary from franchise to franchise and should be based on the nature of the business. Additionally, there are a number of franchise calculation methods. All fees will need to be outlined in the franchise disclosure document. As with any business decision, you should seek professional advice from an accountant, franchise consultant and lawyer. If you are a franchisor or franchisee, and need assistance with reviewing or preparation of your franchise agreement and disclosure document, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What are ongoing franchise fees?

These fees cover the ongoing right to use the intellectual property and business system and be part of the franchise network. There are a number of calculation methods for these fees.

What is the percentage of revenue calculation method?

Percentage of revenue is a very common fee method. It involves the franchisee paying the franchisor an amount based on the amount of revenue or gross income that the franchisee is making before taxes. 

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