Franchises incur fees payable to the franchisor for using the brand name and for ongoing training and support. Franchise fees can be categorised into two compartments:
Initial fees
The Franchise Initial Fee is the price a franchisee pays for joining the franchise network and getting access to all the franchise’s intellectual property. It could also be called the Franchise Fee or the Franchise Joining Fee. This fee usually covers the cost of the franchisor’s initial assistance and may include aspects such as training, introduction to financial institutions and launch support. It also consists of a license fee giving the franchisee brand usage rights under the license of the franchisor. Franchise Initial fees in South Africa can range from R60 000 to R250 000 or more.
Ongoing fees
Royalty
The royalty, also called the Management Service Fee, compensates the franchisor for ongoing support. There are two types of royalties, a fixed fee royalty or a variable royalty. A variable royalty is charged as a percentage of sales, while a fixed fee remains fixed but could increase as described in the franchise agreement.
Marketing fee
The marketing fee can also be charged as a fixed fee or a percentage of sales. The Consumer Protection Act has strict requirements for using funds generated by marketing fees. Such payments should be paid into a separate account, and the franchisor should provide feedback to franchisees on the application of the funds. For more information on this, see The legal aspects of franchising in South Africa.
Supply margin
Many franchisors supply franchisees with products to sell or use in their businesses. Access to these products is one of the main benefits of joining a franchise. The franchisor is within its rights to add a margin to product supply. This margin should be competitive and must not be over-inflated. The Consumer Protection Act and The Competition Act have clear guidelines on product supply. Franchisors are within their rights to specify product quality, and franchisees should always adhere to product quality standards.
Fees for additional services
Franchisors may offer franchisees additional services such as accounting, and a fee would be levied on these services. Additional fees should be described clearly in the Disclosure Document and Franchise Agreement. The franchisor may also recover some costs or expect the franchisee to recover expenses such as travel and accommodation for staff when they attend additional training sessions.
The fees described above are the most common fees levied by franchisors. Potential franchisees should ensure they understand all fee requirements when investigating the franchise.
