Every business owner wants to avoid unnecessary expenses which cut into business profits. Generally, however, there will be ongoing costs related to ensuring that your business:

  • sells quality products;  
  • maintains a professional level of service; and
  • meets minimum industry standards. 

In a franchise model, these considerations also determine the franchise fees that franchisees must pay from year to year. It is important to review and understand what fees are payable when operating a franchise business. You should conduct this review before you enter into a franchise agreement.

This article will discuss the types of: 

  • ongoing franchise fees you can expect to pay; and 
  • unexpected costs which may arise. 

Common Franchise Fees 

The type of franchise fees a franchisor can prescribe are not limited and different franchise businesses may use different terms. Although this is the case, franchisors have an obligation to disclose their fees in your franchise agreement and disclosure document. The Franchising Code of Conduct states this. As a franchisee operating your business from month to month, you can generally expect to pay ongoing franchise fees to the franchisor in the form of:

  • royalties;
  • management or administration fees; and
  • marketing fees.

Additionally, the operations manual may provide further details relating  to the day-to-day expenses of running your franchise business. 

For example, the operations manual may require you to: 

  • maintain equipment on a regular basis; and
  • purchase component products or saleable items from approved providers.  

There can also be fees relating to: 

  • lead generation;
  • IT fees; and 
  • software.

It is therefore important to review the disclosure document to confirm exactly what fees will be charged in your franchise system.

Unexpected Expenses  

During the term you operate the franchise business, some of the largest expenses you may incur could be unexpected. The franchisor is responsible for driving the direction and growth of the franchise brand. Therefore, in order to ensure consistency across all franchise stores, there is generally a contractual requirement on all franchisees to take all necessary steps to stay up to date with these changes.

From time to time a franchisor may want to introduce a new product or service into the market. In these circumstances, there may be unexpected costs in implementing this new change. Unexpected costs may relate to:  

  • purchasing new equipment; 
  • updating store fit-out;
  • training staff to upskill; 
  • upgrading operational software; and
  • arranging store layout modifications.

For example, in a food hospitality franchise, the franchisor of a bakery may want to offer a coffee barista service in addition to selling baked goods. The plan may involve rolling out the new product in select stores to test the market. Here, a franchisee may face the additional costs of: 

  • implementing the new drinks menu; 
  • purchasing new equipment from a supplier approved by the franchisor; and 
  • fitting out the store to make room for the espresso machine. 

Obligation to Act in Good Faith

The requirement to act in good faith generally requires the franchisor to exercise their powers reasonably not arbitrarily. This obligation to act in good faith is enshrined in the Franchising Code of Conduct. It should also be set out in the franchise agreement shared with your franchisor.

Where a franchisor may need to approach a franchisee regarding unexpected costs, they are expected to act in good faith. A franchisor can demonstrate good faith by providing:

  • as much notice as possible; 
  • an explanation that is reasonably suited to the scale of unexpected costs; 
  • a reason for an increase in approved supplier fees; and
  • a window of time for mandatory operational updates to be arranged, to allow the franchisee to finance accordingly.

The above examples are not a checklist of ways a franchisor can legitimise unexpected franchise fees. However, they should illustrate that additional fees can form part of the practical expenses related to running a franchise.

Key Takeaways

As a franchisee, it is important to understand that running a franchise business may often involve fees payable to your franchisor. The types of fees you may have to pay will be dependent upon your franchisor. However, the Franchising Code of Conduct requires franchisors to disclose all ongoing franchisee fees payable to them. Accordingly, it is important for you to review the disclosure agreement to understand what fees you will need to pay. If you have any questions about franchise fees, contact LegalVision’s franchising lawyers on 1300 544 757 or fill out the form on this page.

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