A franchise is a unique business arrangement where the franchisor provides the franchisee with the branding elements, recipe and sometimes the customers to run an efficient business. The franchisor has spent years developing and refining the business model. It is also the franchisor’s role to continue researching and developing to ensure that the business model remains competitive. In addition to ongoing development, the franchisor provides franchisees with ongoing support and training. Franchisors charge franchisees a monthly fee in the form of a royalty to compensate the franchisor for these services. Some franchisors refer to this as a management service fee, which also pays the franchisor for services delivered to the franchisee.
How franchise royalty fees are determined
The franchise royalty fee is usually determined as a percentage of the franchisee’s sales that is fair and affordable to charge. When researching franchise opportunities, it’s good to compare the fees charged to ensure they are market-related. Some franchisors charge a royalty as a percentage of sales, but others may charge a pre-determined fixed fee. In both instances, it’s a good idea to double-check the franchise agreement to understand how the fee is determined and whether any increases will be applied.
Services covered by the franchise royalty fee
The franchisor should provide the franchisee with ongoing services for the monthly franchise royalty fee. The following services may be included in this fee:
- Technical and operational support
- Regular communication with franchisees
- Quality evaluation visits
- Consumer services such as a helpline
- Regular meetings to discuss the business profitability, growth and sales projections for the franchise
- In-store training for the franchisee and staff
Other ongoing fees
Franchisors usually require franchisees to contribute to a national marketing fund. These fees may also be determined as a percentage of monthly sales or as a fixed fee. The critical thing to note is that the Consumer Protection Act requires franchisors to pay these funds into a separate bank account and that the spending of these funds is subject to the requirements of the Act as it pertains to franchising.
Accounting or other fees
Some franchisors provide additional services to franchisees that they would have received from other external service providers, such as accountants. The franchisor must disclose all fees payable in the Disclosure Document and Franchise Agreement.