Are you considering purchasing a franchise, or have recently become a franchisee? Understanding franchisee fees is crucial to your successful navigation of this new opportunity. Each franchise varies, meaning a fee charged by one may not apply to another. This article will explain the costs involved in buying a franchise and the different categories of fees.
Franchisee fees can generally be split into three categories, as follows:
- fees which are charged before or simultaneous with entering into a franchise;
- fees which are ongoing during the term of the franchise agreement; and
- fees which are payable at the end of the franchise agreement.
Before or Simultaneous With Entering Into a Franchise
Franchise Fee
As a potential franchisee, you will be required to pay a franchising fee before or simultaneously with entering into the franchise. This fee can vary greatly, ranging from a few thousand to hundreds of thousands of dollars. Franchises with strong brand power generally impose a more significant franchise fee.
This fee serves the purpose of the franchisor granting you, the franchisee, the specific franchise territory and the right to use their intellectual property, such as:
- brand;
- trademark; and
- operating secrets.
Site Fee or Fit Out Fee
Many franchises operate from a set location. Accordingly, this fee is paid in order to allow the franchisor to:
- locate a store from which to operate the franchise; and
- fit it out according to the franchise image.
In cases where an existing store exists, most franchises will still require the incoming franchisee to pay a fit out fee. This fee is necessary to update the existing layout of that store. Again, this fee has a significant variance and can range from a few thousand to hundreds of thousands.
When searching for a location, it is crucial to ensure a clear understanding of the criteria for selecting a store location by both you and the franchisor. Further, documenting this in writing is essential to prevent confusion.
Training Fee
The training fee covers the franchisor’s costs to train you in business operations. Generally, the fee only accounts for the actual training. Therefore, you will need to take into consideration travel, accommodation, and meal costs when calculating this. Franchisors are required, however, to provide an estimate of the total training fee. However, you should always remember that they are just estimates.
Ongoing Fees
Royalty
Royalties are the most common ongoing fee. This fee gives the franchisee the continuous right to use the franchisor’s intellectual property, such as:
- the trade marks;
- brands;
- logos;
- special methods; and
- techniques.
Generally, this can be anywhere between 5% – 15% of the weekly revenue or a fixed amount. Not all franchisors charge this fee, at least not under the name “royalty.” Instead, it is frequently integrated into the management fee, combining both fees into a single charge.
Management Fee
Also commonly known as the administration fee, a franchisor will use the income from this fee to manage the franchise network. This generally includes managing suppliers, managing franchisees such as yourself, and the day-to-day business of running a franchise network. This will generally be around 5% – 15% of the weekly revenue or a fixed amount.
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Marketing Fee
The marketing fee, also known as the marketing contribution, is a standard charge that each franchisee must contribute toward. Sometimes, the franchisor will also contribute to this pool. The money from this fund is used for overall franchise marketing, promotions, and advertising. Occasionally, the franchisor may also require you to spend a portion of your weekly revenue or a fixed sum on local marketing for your territory. This requirement generally supplements your existing contribution as a marketing fee.
Continue reading this article below the formAt the End of the Franchise
Transfer Fee
Most franchises require you to pay a transfer fee when selling the business. This fee can be calculated as either a one-off amount or a percentage of the sale price. Franchisors typically impose this fee regardless of whether the incoming franchisee is finally approved. This is because the cost generally relates to the expense of assessing their suitability.
Key Takeaways
As a prospective or current franchisee, it is crucial for you to grasp the diverse fee structures in franchising. These franchisee fees can be categorised into upfront, ongoing, and end-of-term. The franchise fee, which is higher for recognised brands, grants you crucial rights, and you may encounter additional costs such as site or fit-out fees, along with a training fee covering initial training. Ongoing fees encompass your use of intellectual property, network management, and contributions to marketing efforts. When you sell the franchise, a transfer fee is applicable, regardless of the incoming franchisee’s approval status. Navigating these complexities requires clear communication and written documentation.
If you would like assistance in understanding franchise fees or require guidance on franchises in general, contact our experienced franchise lawyers 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.
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