In this section we will be looking at franchise fees, what they are and what they cover. We will also look at franchise desposits. Franchise fees can be split into two categories – initial franchise fees and ongoing franchise fees.
Initial franchise fees
The initial franchise fee covers the cost of training and assistance in setting up the business including recruitment, territory analysis, site identification, stationary, franchisee launch, etc. In addition, there will be an element of recovery of franchise development costs by the franchisor.
If you are unsure if you are paying too much for what you get, then consider the following points:
Firstly, the standing of the network’s brand – there is usually a correlation between brand recognition and the time it takes a new franchise outlet to reach breakeven. It may be justified for a well-established network to charge a higher upfront fee.
And secondly, the initial assistance you will receive, is it sufficient? It should cover some or all of the following:
- Initial training that covers all areas of running the franchise business
- Assistance with site selection and lease negotiations
- Assistance with fitting-out the premises and buying initial stock
- Access to preferential suppliers
- Help with staff recruitment and training
- Assistance with the preparation and launch of your franchise
- Access to support staff who will be there at the initial launch of your franchise and for the first day after it to make sure that everything runs smoothly, and any problems are dealt with.
You need to then look at how much it would cost you to similarly start your own independent business from scratch and if you physically have the know-how and skills to do it. This will give you an idea if you are getting value for money.
Ongoing fees (Royalty Fees)
The ongoing franchise fee is paid on an ongoing basis once the business is up and running. It is based upon a percentage of the ‘gross revenue’ or sales of the franchisee after deducting GST. There is no set formula; rather it depends on the split of responsibilities between franchisee/franchisor. The more the franchisor does the higher the fee. In some cases there will be no on-going fee – it will be covered in a mark-up on the product. There are also cases where the franchisor will justify an increase in fees on issues such as extra start-up costs and inflation. In any case the type of fees to be paid, its regularity and whether it can be increased or decreased should correctly reflect the services the franchisor will provide, and should be properly communicated to the franchisee before agreements are reached.
You therefore need to know:
- How much the royalty fee is?
- How often it is to be paid?
- Is it a percentage or fixed amount?
- If a percentage, what is it based on?
- How does it compare to other franchise systems?
Advertising fees are used to advertise the franchise system. Normally an advertising fee is based upon a percentage of gross sales or net sales (though it can sometimes be a stated amount). They typically range from 1% to 5% of gross sales.
The fees are often put into a regional or national fund to be used for either regional or national marketing or advertising campaigns.
Franchisors in their start-up phase may not ask for an advertising fee to be paid, as they would not expect to achieve any real benefit, i.e. in terms of increase in sales or brand awareness, via a regional or national campaign. They will however expect the franchisee to pay for local advertising to promote their franchise.
You need to know:
- What the fee is?
- Is the same fee paid throughout the network?
- How it compares with other systems?
- What you get for your money?
- If the franchisor can spend the fee on how they see fit?
- Will an advertising fee benefit the system?
- Or your franchise?
Some franchisors may charge all or some (or none!) of the following fees:
- Training fees, initially and on-going
- Consulting fees
- Site selection fees
- Leasing fees
- Blueprint and specification fees
- Grand opening fees
- Auditing fees
- Accounting fees
- On-site management fees
- Application fees
- Exclusive territory fees
- Renewal fees Transfer fees
- The longer the franchise contract, the larger the initial fee
- The greater the perceived reputation of the franchise, the higher the initial fee
- The greater the reliance on the franchisors efforts and support, the higher the fee
- Renewal fee is when a franchisee is charged a fee by the franchisor on granting an extended contract term.
- Transfer fee can be charged when the franchisee sells the outlet to another person.
- Where on-going fees are absent, mark-ups or rebates on products supplied to franchisees normally substitute them.
- On-going fees are structured as a percentage of turnover, but in some cases a flat weekly or monthly payment is charged.
- Advertising or marketing fees are sometimes collected for the promotional activities on behalf of the whole network.
- ‘Special’ fees may also be charged by the franchisor for services such as training in the use of new software.
Some franchisors also charge a franchise deposit that may be non-refundable. Unless the deposit is for a nominal sum, or the franchisee gets something for their money, such as a specific territory reserved for them, the deposit should be refundable. Franchisees must make sure that before they part with a deposit they receive a written confirmation from the franchisor that:
- if the franchisee goes ahead and signs a franchise agreement, the amount of the deposit will be credited towards the payment of the initial franchise fee;
- and the precise circumstances under which it is non-refundable/refundable with the appropriate time limits.