What is a franchise / franchising?
What franchising fees are paid by franchisees?
Franchising involves a number of different fees which, for the most part, complement each other:
- Unique Entry Fee
It is customary for a franchisee to pay a lump sum when they acquire a franchise. This purchase fee is primarily a prepayment to the franchisor for the building up of the market, the level of recognition and system development. The amount to be paid is calculated on the basis of the investments effected, the value of the proffered know-how (including patents) and the extent of the support which is to be given to the franchisee from the time he/she commences business. Support which is especially frequent in this respect is advice as to location, the planning of the furnishings and equipment, profitability calculation, basic training and publicity for the opening.
- Continuous Franchise Fees
Typically the regular fees cover the services rendered by the central system to the franchisee after he/she has commenced business, notably in this context assistance with financing, management assistance and training facilities by the central system. Most franchisors prefer payments dependent on turnover to a fixed royalty, in order to underline the extent to which their own returns are dependent on the earnings of the franchise. The rates, which vary widely, are mostly based on turnover as exactly defined by contract.
- Advertising Fees
Advertising fees are frequently the occasion for a special arrangement. The costs of marketing initiatives may either be included in the fixed royalties or be raised separately as a special advertising fee. Where the fee is indicated separately it is customary to pay a proportional share of net turnover or a advertising pool as opposed to paying a fixed sum at regular intervals. When the central system exacts a fee earmarked for advertising, you as franchisee can expect concrete proof that the money raised is so used. Enquire about the investment in advertising in your area which is guaranteed to you by contract and the advertising expenditure incurred by your franchisor. Should for example, all franchisees contribute to an advertising pool, then the advertising fee is as a rule laid down as being exclusively intended for the purposes of system advertising. Check to see what rights of participation and control you may have with respect to the use to which the money so raised is put.
- Other franchising fees
Franchising also involves other fees that may be charged depending on the franchise system:
The service fee for support services provided by the systems head office – such as training, assistance, purchasing etc. – are, for the most part, covered by the ongoing franchise fee.
If it is compulsory for franchisees to purchase certain goods, then some franchise agreements include mark-ups on the price of such goods. These mark-ups are charged either in addition to or instead of a franchise fee. Generally, franchisors must disclose such mark-ups as well as any refunds made by suppliers.