Initial Franchise Fee
Typically a new franchisee will pay an initial franchise fee intended to cover:
- the proportionate cost incurred by the franchisor in developing the franchise network; and
- costs incurred by the franchisor in helping to set up the specific franchise for the new franchisee e.g. training, assisting the franchisee in choosing a territory and suitable site, advising on equipment/fitting out, launching the franchise etc.
Ongoing Franchise Fees/Franchise Royalty Fees
Ongoing franchise fees (royalty fees) payable by the franchisee can be a fixed sum but are more generally calculated as a percentage of turnover – usually in the range of 2-12%. You need to decide whether these payments should be made weekly or monthly. Weekly payments will assist your cash flow and also have the advantage of enabling you to quickly pick up on any issues if the franchisee fails to make payment.
Franchisee Advertising/Promotional Charges
You may want to charge an advertising levy for advertising the brand and promotional activities. These are charged as a percentage of the franchisees’ turnover and generally range from 1% to 5% of gross sales. Again you need to consider whether it would be appropriate to charge these fees weekly or monthly.
Other Franchisee Charges
There may be other services that you are able to offer franchisees such as IT support, accounts back up and employment packages for which you would charge a fee.
If you would like to receive advice on any of the topics set out in the 10 Steps if Thinking of Franchising Your Business Guide, or any other aspect of franchising, then please do call to speak to a franchise solicitor: we are happy to give initial advice without charge or obligation.