If you are considering buying a franchise business, it is important that you know what fees you will have to pay to the franchisor.
There are various fees involved with buying a franchise business. Knowing which ones to expect can be super handy.
Let’s break down franchise fees and what they mean for you and your business.
What Are The Initial Costs Of Buying A Franchise?
Once you have signed your Franchise Agreement, it is common practice to pay your initial franchise fee.
An initial franchise fee is generally an upfront fixed fee that is paid in a lump sum to the franchisor.
The initial franchise fee covers the cost of the basics such as:
- The franchise relationship;
- Franchise operating systems;
- Training services; and
- Basic marketing materials.
The initial franchise fee amount will be dependent on the franchise business that you decide to purchase.
Industries and companies will vary in initial franchise fees. Doing your research and ascertaining a rough expected amount is always a great idea before entering into a Franchise Agreement.
What Are The Franchisee’s Fit Out Fees?
A franchisee’s fit out fee is the cost associated with having your franchised business completely fitted out and set up.
A franchisor is generally responsible for organising your franchised business’ fit out whilst the franchisee owes the franchisor a fee to compensate for this fit out.
A franchise fit out fee will include the costs of all the equipment, infrastructure and branding required for your franchised business to be ‘set up.’
For example, if your franchise business is a hospitality business, your fit out fees may include the costs of:
- A Industrial kitchen fit out;
- A bar fit out;
- Any necessary operating equipment such as a cash register; and
- Any business specific branding such as a business sign.
The fit out fee will be dependent on the franchise business that you have purchased.
For example, if your franchised business requires a significant amount of equipment and infrastructure to be properly completed, the fit out fee will likely be higher. Similarly, if you have purchased a franchised business that requires little equipment and infrastructure, then your fit out fee will likely be less.
What Are The Franchisee’s Legal Costs?
A franchisee will only be required to pay the legal fees of the Franchisor that are associated with the preparation, negotiation and execution of the Franchise Agreement.
On 1 July 2021, the updated Franchising Code of Conduct (the Code) came into effect.
The new Code states that a Franchisor can only pass on legal costs to the franchisee if:
- The legal costs are connected to the preparation, negation or execution of the Franchise Agreement and;
- These legal costs are specified in the Franchise Agreement.
Franchisors are prohibited from recovering legal costs that go beyond the legal costs associated with the preparation, negotiation and execution of the Franchise Agreement. Any franchisor that does so will be liable to a substantial penalty.
As such, under the new Code, a Franchisee is not obligated to pay any legal costs to the Franchisor that may be in relation to documents such as:
- A termination notice;
- A breach notice;
- A renewal notice or;
- Any other legal document.
To reiterate, a franchisee is only obligated to pay the legal fees associated with the preparation, negation or execution of the Franchise Agreement. Any legal fees incurred by the franchisor post the Franchise Agreement being signed, cannot be transferred to the franchisee.
Are There Any Ongoing Franchise Fees?
Yes, there are.
As your business is a franchised business, you will be required to pay ongoing fees to the franchisor.
Ongoing fees may include:
- The cost of having an ongoing relationship with the franchisor;
- The cost of operating under the franchised business name;
- Royalties (a percentage of the profits that you make);
- Marketing or advertising costs;
- Administration costs;
- Intellectual Technology (IT) costs.
Again, the amount that your ongoing fees will be will be dependent on the type of franchise business that you have purchased.
Some common ways that Franchisor’s ensure that they receive their ongoing franchise fees are via:
- A fixed fee;
- A percentage of sales or;
- A percentage of profits.
It is common for your franchisor to require a fixed fee after each month to cover your ongoing franchise fees. However, other companies may require you to pay your ongoing franchise fees as a sum dependent on the percentage of sales or profit you made in that month.
Whatever way your franchisor requests that your ongoing franchise fees be paid, it is important that you calculate these fees correctly and pay them accordingly.
Some ongoing franchise fees may be required at different times to others. For example, you may be required to pay your administration and IT fees monthly but pay your royalties annually.
Whatever the unique arrangement between you and the franchisor, it is important that you are aware of what fees are due and when.
What About Fees In Relation To The Lease?
Depending on the type of franchise business that you purchase, you may or may not be responsible for sorting out your business’ lease or space.
It is not uncommon for franchisors to assist franchisees with sorting out where the franchised business will operate.
Franchisors can assist in negotiating lease terms and help shed light on what other franchisees have done to be successful in securing a lease.
Alternatively, a franchisor may enter into the lease themselves. In this instance, the franchisor would be considered the lessee and deal with the lease terms themselves.
In both the instances where you as the franchisee enter into the lease or the franchisor enters into the lease themselves, there will likely be additional fees associated.
If you are leasing a commercial space, there may be rent, insurance, repairs and maintenance fees associated. You can find more on this here.
Alternatively, if the franchisor is leasing out the space, they may transfer some of these fees over to you.
Whatever fees are associated with the lease of the space that your franchised business is occupying, it is important that the terms of the payment of these fees are detailed in your Franchise Agreement.
Ensuring that you are aware and on top of all the additional fees that may be payable to the franchisor or your landlord is imperative to the success of your business.
What’s A Fair Fee, Is Due Diligence Important?
Exercising your due diligence will help to ensure that you are paying fair and reasonable franchise fees.
As mentioned above, the fees associated with your franchise will be dependent on the industry or type of business you enter into. It can be really important to do your research to ensure this.
Having a professional lawyer draft or review your Franchise Agreement is always a good idea to ensure that you are meeting all of your obligations as a Franchisee and are not being subjected to any unfair terms.
Laws around franchising can be quite dense, and is an area of law that requires expert legal help. We have a number of resources to guide you in various stages of the franchising process, such as:
- Selling A Franchise
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- Franchise Agreements
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisee’s Legal Obligations
- What Are Franchising Royalties?
- Franchise Grant Process
We’re here to help!
Having your Franchise Agreement drafted or reviewed by a professional lawyer can help ensure that you are entering into a fair and reasonable Franchise Agreement.
At Sprintlaw we can help you review your Franchise Agreement quick and easy.
Reach out to our team for a free, no-obligations chat at email@example.com or 1800 730 61.
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