What are typical franchise fees, and when does it just get ridiculous?
Let’s just start with the obvious typical franchise fees. There’s an initial franchise fee that most often gets the franchisee trained and the rights granted to them. Usually some inventory and other bits and bobs to go with it. When we ask people what their idea of typical franchise fees are this is the most popular answer. Most investors also appreciate that there is a royalty to be paid to the franchisor and that’s likely to be the biggest fee over time. Finally maybe there are some nominal costs which cover technology licenses and an advertising commitment payable through Head Office.
For many franchisees that’s about it. However, there are potentially dozens of other fees within a franchise agreement. Particularly with North American brands. Here’s a breakdown of costs to highlight some typical franchise fees, and some not so typical!
Don’t be paranoid if you’re looking at a franchise purchase with any of Lime’s clients – you wont find anything like the number or type of fees on this page! All our clients cover the basic engagement and have fair, typical franchise fees. But just for fun, let’s cover the common franchise fees and highlight the franchise fees that get ridiculous! We’ve seen it all over the years. Furthermore, this may not be an exhaustive list!
What is an Initial Franchise Fee?
This is the “get you going” investment which covers the launching of the franchise from the franchisors perspective. It doesn’t cover costs that you might also need to account for. Those might include asset acquisition, vehicles, premises and such like. Once you’ve added all those up bear in mind you’ll likely need access to further capital. That capital has to support you and cover overheads until the business is on it’s feet. The initial franchise fee needs to be at a level that the franchisors costs are met.
What is a Royalty Fee?
Fixed or percentage. Fixed ones can rise annually either in line with inflation or RPI or the greater of both. Percentage ones are cheap when you aren’t doing very well, and expensive when you are. As a result percentage based systems hurt the franchisor if the franchisees are struggling and vice versa. Furthermore there is a strong argument that this is a sort of “wrong way around” arrangement. A franchisee who is earning the least royalty requires the most support and sucks up the most Head Office resources. Maybe that franchisee is given extra rights such as working off territory or even helping the franchisor deliver some business. Clearly though that franchisee pays the least for it. A top performing franchisee pays the most royalty, but probably needs the least assistance. A fixed fee royalty has an inherent fairness to it but it isn’t always the best fit for a franchisor or franchisee for various reasons.But that’s a huge topic and you’ll need a franchise consultant for that!
What is an Advertising Levy?
Two costs to look out for here. It is common that all franchisees contribute a sum into a central pot. The franchisor or a selected team of franchisees administer and spend that pot. Be aware that some franchise agreements permit the franchisor to make deductions from the levy to cover the costs of administering the levy. That’s not a typical franchisee fee and it may seem harsh but a franchise is a contract and if it’s in the contract then hey – that’s the deal!
What are Local Advertising Fees?
Many franchisors require that franchisees spend a minimum amount on local advertising. This isn’t orchestrated by the franchisor or paid via the franchisor. A % of turnover or a fixed amount or a minimum amount is common. These are often seen as typical franchise fees, but they’re not really. They are a typical business expense irrespective of what business you are in.
What is a Franchise Technology Services Fee?
There was at time that you bought software and owned it. These days it’s all about recurring licenses and so typically the franchisor will decide what form that takes. Fees for technology are very typical franchise fees these days. Franchisees will pay for those licenses and Head Office will often stipulate the specification. Technology costs can be applied to many things other than software so it’s best to fully understand these expenses to avoid any nasty surprises down the line.
What is a Franchise Deposit Fee?
A deposit for a new franchise may be retained by a franchisor in the event that a franchisee doesn’t complete the purchase. Or as is more common a portion of the deposit will be retained and a balance refunded. Franchisors honour the principal of deposits by turning away other franchisees who might want the same location or territory or commencing some work for the franchisees eventual benefit. If costs are incurred it is unlikely you’ll get the whole deposit, or even a portion of it back should you later change your mind.
For the most part the above fees are pretty much what should concern most franchisees. However, if there’s one thing that decades of experience provides it’s an in depth knowledge of what many franchisors do well and don’t do well. Read on to discover what we think are probably the less typical franchise fees we have come across.
What is a Local Cooperative Fee?
This can be quite expensive between 1% -3% of gross sales. Note the word gross there! It’s usually where franchisees group together to place local advertising. More common across the pond in North America. So maybe a newspaper overlaps 10 franchise units and one advert would do for all of them. Here at Lime we think this is a great example of excessive fees. If you have a local cooperative fee in your agreement you’ll pay this in addition to a national fund, and your own local advertising!
What is a Remodelling Fee?
Common with premises based businesses. You might expect a price per square metre or a capped amount to update the outlet from time to time or upon renewal of the franchise agreement.
What is a Decor Update Package?
We’ve seen remodelling fees apply to new branding and decor update packages apply to items that are still on brand but need updating after a period of time or even after a certain amount of turnover! No one wants a tired looking franchise do they? So when things start to look a little shabby expect a cost to update the decor.
What is a Minimum Age Fee?
A minimum age fee is an interesting one because this can be abused somewhat. Just like the decor updates to a degree but it sets a time limit on assets within the business. Typical franchise fees in this category might be applied to a vehicle for example. The franchisor may stipulate that your liveried van has to be no older than 4 years old. You can see the logic for this but it’s also true that being forced into a new lease even though your current van is tickety boo does grate somewhat. Minimum age fees can be applied to lots of assets.
What are Franchise Renewal or Transfer Fees?
Time flies by and soon enough your franchise agreement will be up for renewal. The cost of dealing with this may well be nominal. However, expect a few grand as a minimum for the right to the new agreement. You may also need to pay for legals and the renewal may trigger a decor update fee and a minimum age fee. Watch out for franchisors who require that a sum equal to the initial franchisee fee is paid again in full. You decide if it’s worth it…
What are Franchise Resale Fees?
When a franchisee sells a franchise the franchisor is put to considerable expense. Not just the expense of dealing with every enquiry but also then training and supporting the newbie. Typical franchise fees for the granting of the resale can include a straight percentage fee of the total consideration or a fixed amount. Sometimes a franchisor may charge a fee to the incoming franchisee too for their initial training and support. In addition, an outgoing franchisee may have to pay an additional fee if the franchisor introduced the buyer. Many franchisors introduce the buyer anyway and so act as a business broker in effect. Business brokers charge a fee and so too therefore do franchisors.
What is a Franchise Audit Fee?
Naturally there is some resistance to audits. Because the real issue isn’t just decor and service standards, it’s royalty compliance! But franchise owners need not worry. It is only fair that a franchisor can check compliance with the agreement. In doing so the franchisor incurs a cost which is usually the cost of the franchisor. However, if there is a material discrepancy found between what has been reported and what the audit finds then the franchisor usually has the right to charge for the audit.
What is a Franchise Mystery Shopper Fee?
A franchisee may have to cover the cost of a mystery shopper to ensure that standards required are being implemented. If you’re a multi location franchise owner this is per location! Sometimes it’s just a franchisors routine exercise, sometimes it’s prior to an audit. Sometimes its just a money making exercise!
What are Collection & Interest charges?
Not just the late payment of commercial debts (Interest) Act 1998. Be sure to understand what happens within your franchise agreement if you are a late payer!
What are mandatory and additional training fee?
Mandatory training costs are charged for various reasons including, changing legislation, material shifts in the business model, new software etc. It’s a necessity in many business environments. You simply just have to be trained on it! Additional training will more likely be to address underperformance issues within each franchise or perhaps when a new member of staff joins and they need Head Office induction or training. Sometimes if a new franchisee doesn’t attain the standard required after their own initial training then a franchisor may arrange additional training at additional cost.
What are Additional Persons Fees?
Initial training is usually limited to a certain number of people, thereafter it costs extra. Most franchisors don’t want the family coming along or a bunch of other shareholders or advisors. But, if you especially want that, and the franchisor agrees then you may trigger an additional persons fee.
What is a Unapproved Franchise Advertising fee?
Does just what it says on the tin. If a franchisee places any advertising that isn’t brand complaint or approved then some franchisors will charge a fine. We’ve seen tiered examples not unlike the following:
1st infraction £250
2nd infraction £500
3rd infraction £1,000
What is a New Franchise Product evaluation fee?
If a franchisee wants to introduce a new product into the system then the franchisor will need to put some time into evaluating this and that time incurs a fee.
What is a New Franchise supplier fee?
If a franchisee wants to introduce a new supplier to work for them or the franchise network then the suppliers evaluation and maybe onboarding incurs a fee.
What is a Franchise Hold Harmless Fee?
This typically is an acknowledgement by the franchisee that they must meet their own expenses when defending anything relating to their own franchise company. Hold Harmless means the franchisor is not required to pay for anything resulting from a case a franchisee may have to get involved with relating to their franchise and another party. So that could be lawyers fees, damages, civil action or any claim against the franchisee.
What is a Franchise Opening Extension Fee?
Let’s say you’ve signed the agreement and you’ve now got 12 months to get the shop doors open. But you’re late for whatever reason doing so. Some franchisors have clauses in their agreement that allow for a fine. We’ve seen $1,000 / month in North America which only stops when a location opens or the franchisor terminates the agreement! Thankfully we’re not used to seeing typical franchise fees like this one in the UK!
What are Franchise Arbitration fees?
Most franchise agreements have a mandatory arbitration clause within them. The fee for this are usually met by each party so as a franchise owner it’s going to cost you if you go down this route. This is actually one of the more typical franchise fees we see in nearly all agreements. However, it isn’t common that it is charged because most disputes don’t go this far.
What are Franchise Enforcement costs?
There could be fees for trademark protection, intellectual property rights and enforcing restrictive covenants if a franchisee breaks the terms of the agreement. The costs of enforcing those rights is often covered within the terms of the agreement.
What are Franchise Fines?
Fines for unapproved advertising are one thing, but what about fines for insufficient liquidity, or not turning up for a conference? We’ve seen them all!
What are Insufficient funds fees?
To be fair to many franchisors who are in a regulated industry it is a requirement that there is a minimum liquidity in each franchise. So the franchisor wants to enforce this within the agreement by way of a fine if a franchisee doesn’t comply. Similarly if a franchisee has insufficient liquidity to fund the franchise in any way a fee may be charged. In the old days when a cheque might bounce this would have triggered a fee if this clause was included. These days this style of fee, if adopted by a franchisor, is chargeable for any occurrence of this nature. As a result stopping a direct debit might also trigger it.
What are Non attendance fees?
No shows at meetings with your franchisor can incur a franchise fine. As a result this may be a fixed fee. we have even seen agreements where non attendance at a franchise conference results in a 1% increase in royalty for the remainder of the year!
What are Franchise Management Appointment Fees?
If for any reason a franchisee is unable to fulfil the contract then the franchisor may include rights to appoint a manager. Maybe through illness or even death of the owner, franchisors may appoint a manager and charge an excess over the managers costs for keeping the franchise running. We’ve seen costs + 100% in some agreements!
What are Franchise Termination Fees?
If it all goes wrong for you, or your circumstances change and the franchisor consents to an orderly termination then you’d better hope you’ve got a compassionate franchisor. This is contract law people and if a franchisee or a franchisor for that matter wants to step away then that’s a breach of contract. The value of any breaches of contract can be the subject of litigation against franchisees or franchisors. However in the context of this article a fee payable by. the franchisee is usually agreed and that represents a termination fee.
What Are Typical Franchise Fees
Remember that for the most part the inherent deal is an initial franchise fee, a royalty and an advertising contribution. Maybe also a technical services fee which is probably software related. Don’t see the advertising contribution or technical services expenses as fees though. They’re collected as fee’s but deliver value to a franchisee as if they’ve paid it to a supplier directly. Any small business owner would expend money like this whether they’re a franchise or not.
Take comfort that Lime’s clients don’t charge ridiculous franchise fees. If you’re a potential franchisor then contact us to structure a franchise arrangement that wins for all parties. In franchising the winner isn’t the franchisor one who charges the most, it’s the franchisor who find the balance that works best for the franchisee and the franchisor.
Andy Cheetham has been designing franchise systems for almost 30 years. A 5x franchisor himself, he and his elite team of franchise specialists provide clear guidance and recruitment services to franchisors and franchisees.
Call Andy today on 07782 115993.