Running a franchise requires payment of many various fees. These fees can be categorized into ‘initial’ and ‘ongoing’ costs. Franchise lawyers can give you advice about which fees are fair and which are unreasonable. What are the costs you need to keep in mind when you run a franchise?
Initial franchise fee
New franchisees are required to pay the initial franchise fee, which usually pays for training and the process of setting up the new outlet. The franchisor will also be able to recover some of the development expenses that are incurred in the initial phases.
If you are in doubt as to whether the amount you are required to pay is fair, speak with a franchise lawyer and think about the following matters:
1. Brand Power – How recognizable is the brand? It might be the case that the stronger the franchise network, the more likely they will charge a higher upfront cost. This is because they can more easily (and quickly) break even.
2. Initial Assistance – You are entitled to some initial help when setting up the business, which is supposed to be enough to pay for the following:
- Training for all areas of the franchised outlet;
- Lease negotiations and selecting appropriate location;
- Fit-out and initial stock;
- Supply contacts;
- Recruitment of employees;
- Launch date preparation; and
- Extra support staff for the first couple of days of business.
Then you need to consider whether you could independently set up your own business with your knowledge and skills set. This will ultimately determine whether you are getting value for money. A franchise lawyer can help in this regard.
Also known as royalty fees, the ongoing fee is paid on a regular basis after the initial set-up. This fee is a percentage of gross revenue less GST. There are several methods used to work out the fee, which may differ depending on how the franchisor and franchisee share the load in running the business. Generally speaking, the more involved the franchisor is in operating the business, the higher the fee. In some franchise relationships there is no ongoing fee, rather there is a mark-up in the price of the products being sold. The franchisor will sometimes impose additional fees based on the higher set-up costs/inflation. Regardless of the arrangement, a franchise lawyer should be consulted. The frequency, amount, and conditions of changing the fee amount should reflect the level of involvement of the franchisor.
What to ask your franchise lawyer
There are several questions that are paramount:
1. What is the royalty fee?
2. When is it paid?
3. Is it a fixed-fee or percentage-based? (If so, on what basis?)
4. What do other franchisees pay?
A regional/national marketing fund is often used to pool funds from the franchisees so they can contribute to regional or national campaigns. These advertising fees are sometimes fixed, though more often they are based on sales figures.
In some cases, no advertising fees will be required during the startup stage of the new franchised outlet. This might be the case for regional/national campaigns; however, local advertising costs are ordinarily incurred by the franchisee, even during the first few weeks of the new franchise.
There are several questions you’ll need to ask your franchise lawyer, including:
1. How much is the fee?
2. Do all franchisees pay the same fee?
3. What fees do other franchisors charge?
4. What does the fee buy?
5. Who decides what the money is spent on?
6. Is an advertising fee necessary?
These are some of the additional fees that you will need to go over with your franchise lawyer:
- Site selection;
- Exclusive territory; and
- Renewal fees.
Other matters to consider
- Usually longer contracts have higher initial fees;
- The more reputable and established the franchise, the higher the initial fee;
- The more involved the franchisor, the higher the fees;
- Upon renewal of the term, a fee will usually be charged;
- A fee is imposed when the franchised outlet is transferred to a new franchisee;
- If no ongoing fees are charged, mark-ups on the products/services will be charged instead;
- Ongoing fees can be percentage based or flat rates; and
- A marketing fund is typically coordinated on behalf of entire company.
Legality of franchise deposits
In some cases, franchisors will require payment of a non-refundable deposit. This is only legal in certain circumstances. For example, the deposit might be for a very small amount, or the franchisee might get something for the deposit, like a geographical exclusivity clause drafted into the agreement by the franchise lawyer. If not, however, the deposit should be refundable (or deductable from the initial fee).
Before you pay any deposit, ensure you are provided in writing a promise to:
- Deduct the amount from the initial fee; and
- Any details under which circumstances the deposit becomes non-refundable (time, conditions, etc)
If you are embarking on a journey to become a franchisee, speak with a franchise lawyer about the legality of the various fees. Compare your fee structure with that of other franchisees and be discerning about the oft requested ‘franchise deposit’. Protect yourself by speaking with one of LegalVision’s franchise lawyers.