When you’re looking to expand your business via a franchise system, you should consider what you will charge your franchisees exactly. It is, after all, likely to be one of the first questions a prospective franchisee will ask.
Set out below is a checklist of the typical types of fees franchisor’s charge to get you thinking about preparing your franchise. Note, here, we are talking about ‘fees’ in the context of money the franchisee pays to the franchisor, as opposed to ongoing operational fees payable to third parties.
- Initial fee: This is the large up-front payment for, in essence, the privilege of becoming a franchisee;
- Documentation fee: This is money you pay to have the franchisor’s lawyer draft the franchise documents;
- Supervision fee: Commonly, this is payable in retail franchises, for franchisor to provide the supervision of the fit out to ensure that fit out meets the brand’s needs and requirements;
- Ongoing franchise fee/royalty: This is the ongoing fee payable, usually, weekly or monthly. It can be expressed as a flat fee or percentage of turnover;
- Marketing fee: This is money you pay to the franchisor’s marketing fund, and applied by the franchisor to marketing activities for the benefit of the franchise network generally;
- Training fee: It shouldn’t be too hard to guess what this one is for. One consideration, however, is whether that training will just be up-front, or ongoing (i.e. annual) or in the event of a particular happening (i.e. appointment of a new manager to the franchised business);
- Renewal fee: Most franchises are expressed to be for an initial term and a ‘renewal term’, which the franchisee can elect to take up (subject to certain conditions, of course). Usually, but not always, the renewal fee is a flat amount.
- Transfer fee: In the event a franchisee wishes to transfer or sell their franchised business, the franchisor is entitled to charge for the privilege of investigating and approving that transaction. This can either be expressed to be a flat rate, or proportion of the sale price.
There is no ‘set’ list of franchise fees, and you are only limited by your imagination (and the franchisee’s wallets) in deciding what to charge. Some other, less common, fees include:
- Audit fees, where the franchisor charges to audit the financial accounts (mostly to ensure correct reporting);
- Technology fees, where the franchisor creates and licenses its operational software; and
- Referral fees, where the franchisor establishes a centralised referral system, such as a 1300 number.
All in all, these franchise fees usually add up to quite a pretty penny, and clearly each serves its purpose and should be considered by any prospective franchisor. Importantly, these fees should be incorporated into the franchise documents and the subject of proper disclosure in the disclosure document. A franchise lawyer should, at least at the first instance, draft your disclosure documents to ensure proper incorporation.
If you’re a business owner looking to franchise your business, you should talk to an experienced franchise lawyer about these fees, and how to incorporate them into the required franchise documents.
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