Are you looking at buying a franchise, or have you bought one recently? Congratulations! What fees will you pay as a franchisee? This is crucial to understand, to help you asses if you want to buy this franchise. Each Franchise is different, so where one Franchise may charge a particular fee, another Franchise will not necessarily also charge that fee. Generally speaking, most fees will fall into the following categories.
Types of Fees
Fees can generally be split into three categories, as follows:
- fees which are charge before or simultaneous with entering into a Franchise;
- fees which are ongoing during the term of the Franchise; and
- fees which are payable at the end of the Franchise.
Before or Simultaneous with entering into a Franchise
Almost all Franchises will have a Franchising Fee which a potential Franchisee will need to pay before or simultaneous to entering into a Franchise. This fee can vary greatly. It can range from a few thousand to hundreds of thousands of dollars. The Franchise Fee is generally larger for franchises with strong brand power.
The purpose of this fee is for the Franchisor to grant to the Franchisee the specific franchise territory and the right to use the Franchisor’s Intellectual Property (e.g. brand, trademarks, operating secrets etc.). Something important to note regarding this fee, for all Franchisors and Franchisees, is that Franchisors are only allowed to keep a portion of the Franchisee Fee if the Franchisee decides to exercise their cooling-off rights after entering into the franchise agreement.
Site Fee/ Fit Out Fee
Many franchises operate from a set location. Accordingly, the 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 there is an existing store, most franchises will still require the incoming franchisee to pay a fit-out fee in order to update the existing fit out of that store. Again, this fee has a significant variance and can vary from a few thousand to hundreds of thousands.
A hint for when you look for a location, always ensure that both parties (the Franchisor and the Franchisee) clearly understand the criteria for locating a store. Set this out in writing to avoid confusion.
The last of the major fees, the Training Fee is the fee which the Franchisee must pay to the Franchisor for initial training. Generally the fee will also only cover the cost of the actual training so Franchisee’s will need to take into consideration travel costs, accommodation costs and meal costs when calculating this Fee. Franchisors are required however to provide an estimate of the total Training Fee however, Franchisees should always remember that they are just estimates.
The most common ongoing fee. This fee is simply the fee which gives the Franchisee the ongoing right to use the Franchisor’s intellectual property, such as the Trade Marks, brands, logo’s, special methods and techniques. Generally this can be anywhere from 5% – 15% of weekly revenue or a fixed amount. Not all Franchisors charge this fee (at least not under this name), however, and it can often be found as forming part of the Management Fee so that it forms one fee together.
Also commonly known as the Administration Fee, income from this fee is used by the Franchisor to manage the Franchise network. This generally includes managing suppliers, managing franchisees and the day-to-day business of running a franchise network. Again the fee for this will generally be around 5% – 15% or a fixed amount.
Another common fee, the Marketing Fee (or contribution, as it is also known) is the amount that each Franchisee (and sometimes Franchisor) needs to contribute to the marketing fund. The money from the marketing fund is then used to run marketing, promotions and advertising for the Franchise as a whole. Occasionally the Franchisor may also require the Franchisee to spend a portion of their weekly revenue or a fixed sum on local marketing for their own territory. This is generally in addition to whatever the Franchisee already contributes as a Marketing Fee.
At the end of the Franchise
Most franchisees require a Franchisee to pay a Transfer fee if the Franchisee wants to sell the franchise. This fee can be calculated as either a one-off amount, or a percentage of the sale price. Franchisors will generally charge this fee irrespective of whether the incoming franchisee is finally approved, as the cost generally relates to the expense of assessing the incoming franchisee’s suitability.
These are only some of the most common fees charged by all franchisors and, in most cases, each franchisor will also have additional fees specific to that franchise business. If you would like more information on franchise fees or franchises in general, please contact LegalVision on 1300 544 755. Our franchise lawyers can provide you with a fixed-fee quote for any legal support you may require.