What does a ‘franchise fee’ mean in a franchise agreement?

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Table of Contents

• What is a franchise fee?
• Training
• Conclusion

The franchise model works on the basis that franchisees are able to conduct business under a specific brand and system that the franchisor has developed with success. As franchisees are provided with a right to work under this business, there are not only specific obligations that need to be met, but also franchise fees.

What is a franchise fee?

The franchise fee usually refers to the initial upfront fee paid as a result of entering the Franchise Agreement. This fee depends on the size and the value of the business and usually varies quite significantly across different industries. The Disclosure Document that you receive should outline the fee to be paid, but should also detail the down payment of a deposit, the final due date for payment of the fee and also whether or not the fee is refundable.

The initial franchise fee can be a negotiable part of the Franchise Agreement. This is because franchisors generally do not make a profit as a result of the fee. If you have considerable experience in business or can bring significant benefit to the franchise as a whole, the franchisor may be open to considering a reduction in the initial franchise fee.

A franchise fee can also refer generally to all the ongoing fees that may be required as a franchisee. One of the more important and regular fees would include royalty fees. The royalty fees are generally paid each month and are usually required as a service fee to the franchisor.

An advertising or marketing fee is also a common requirement. Franchisors usually need to set up a marketing or cooperative fund and will determine which franchisees are required to contribute to the fund and how much needs to be contributed. Like the royalty fees, the marketing fee is usually paid monthly. The marketing fund may be subject to audits and franchisees may be able to access details of the fund. The marketing fund is used for expenses such as creating and implementing promotional campaigns, conducting market research and possible disbursements to advertising agencies, or legal or accounting services.

Training

Franchisors often provide an initial training program shortly after franchisees enter into the agreement. The initial training program, alongside any other training requirements are necessary for maintaining the success of the franchise and in order to ‘on board’ the franchisee, whether that be in terms of up-skilling for business requirements or for understanding how the franchise wants to represent itself. Although initial training programs are at the expense of the franchisor, franchisees may be liable for paying for ongoing training.

Conclusion

There are various franchise fees involved when you want to operate a franchise. The Franchise Agreement and Disclosure Document are detailed legal documents that outline your responsibility as a franchisee to pay these fees, but also outlines your rights relating to how the fees will be used and your access to information. Our team of expert franchise lawyers can help in reviewing your franchise documents so that you are sure you know all the legal obligations you have as a franchisee!