If you are considering buying a franchise, you must consider the fees you must pay the franchisor. Although franchisees anticipate upfront costs, such as the franchising fee and fit-out costs, you must also consider ongoing costs. This article will take you through three ongoing costs of being a franchisee.
1. Royalties
Royalties refer to ongoing payments for the continued use of something. For example, in the context of franchising, the value of the business’ intellectual property, systems, additional training and support is payable with a royalty fee. Royalty fees are separate from initial franchising fees, which cover the set-up of the business and a broader investment into the franchise.
The franchising agreement will determine how often to pay royalties. However, this amount is usually based on a percentage of your revenue or with a fixed component.
Maintaining the brand through royalties is an essential component of franchises. This is because the brand awareness you get by buying a franchise is the primary reason to invest in a franchise. Without royalty payments, maintaining and growing this brand awareness would be difficult.
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2. Marketing and Advertising Costs
Another ongoing payment franchisees often have to make is contributions towards a marketing fund. This pays for the franchisor’s marketing and advertising of the franchise network. Contributions to the marketing fund are in a dedicated or separate account.
Unless stated in the franchising agreement, franchisees typically do not get a say on how marketing money is spent. Instead, this falls to the franchisor. However, the franchisor is bound by rules in the Franchising Code of Conduct regarding:
- how they can use the money;
- who pays into the fund; and
- requirements to notify franchisees about how they allocated the funds.
Further, the franchising disclosure document also includes details about the franchise’s marketing fund, such as who controls or administers the fund and the kind of expenses for which the fund can be used.
Importantly, marketing funds can only pay for the following:
- costs disclosed in the disclosure document;
- marketing expenses;
- costs of administering the fund; and
- expenses that the majority of franchisees have agreed to pay.
The franchisor must also contribute to the marketing fund if the franchisor operates a franchised business.
Continue reading this article below the form3. Lease Costs
Another ongoing cost associated with being a franchisee is lease payments. This will differ depending on the way your lease arrangements are structured. There are two mains ways to structure leasing arrangements in a franchise agreement:
- you lease directly through a landlord; or
- the franchisor holds the lease and grants you a right to use the premises.
If you choose to enter into a lease with the landlord of the premises, you need to be aware that you have separate obligations to your landlord and the franchisor. You will be solely responsible for negotiating the lease terms and satisfying your requirements under the lease, including paying rent, expenses and other charges associated with the premises.
Ideally, the terms of the franchise agreement and the lease agreement should end simultaneously to avoid relocating to new premises during the franchise term or having the premises but no ongoing rights to the business. You should consider this when speaking to the franchisor about a new franchise agreement and when considering potential locations.
On the other hand, if a franchisor has an existing lease over a premises but wants to retain control, they will likely offer to give you a sublease or licence to occupy those premises. You may then pay a licensing fee to the franchisor to cover the rent and other occupation expenses or pay the rent directly to the landlord on the franchisor’s behalf. In addition, in some instances, the franchisor will ask you to provide a security deposit or personal or bank guarantee to cover the franchisor against the costs of rectifying damage to the premises or non-payment of rent and charges.
Key Takeaways
If you are considering buying a franchise, you must assess the fees you pay the franchisor. In addition to upfront costs, some of the ongoing expenses include:
- royalties;
- marketing and advertising costs; and
- lease costs.
If you need assistance understanding the ongoing costs of being a franchisee, our experienced franchise lawyers can assist 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
Some ongoing franchise costs include royalties, marketing and advertising, and lease fees.
There are two main ways to structure leasing arrangements in a franchise agreement. The franchisee leases directly through a landlord, or the franchisor holds the lease and grants you a sublease or licence to use the premises.
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