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Franchise Fees
Fees are the primary concern of both the franchisor and the franchisee. Your goal, of course, is to make your franchise as profitable as possible for you – and why not? It’s your business, your product, and much of the support and training will come from you. You have every right to profit from your own business.
Franchisees, on the other hand, want to make your business as profitable as possible for them. Again, they have the right to a profitable business: they will be running your business on your behalf, working very hard, and they should see financial gain from the project. The key is to find a balance where you are seeing the maximum possible return from your investment while still allowing your franchisees a fair share in the profits.
There are a number of fees involved in franchising, all of which will be specified in the franchise agreement. Your primary cost, of course, involves paying the lawyer and setting up your franchisees in their new businesses. The franchisee’s fees are slightly more complicated.
The Main Fees
The initial franchise fee is a one-time payment of a significant amount. It’s essentially the franchisee paying you for the privilege of using the business you have worked so hard to build rather than starting from the ground and using their own. The franchise fee is usually non-negotiable because it will be the same for all franchisees.
The other primary fee is the royalty. Royalties are like property rates: even though you’ve already made your purchase, you continue to make payments for services related to your property. Similarly, although the franchisee has already paid you a franchise fee for the bulk of your services, they continue to pay a monthly royalty. In exchange, you provide ongoing support, training, and other services to your franchisee.
Generally, royalties are based on a franchise’s gross sales. Royalties are usually less than 5% and include the business’s entire gross income. They can be paid weekly or monthly, depending how you set up the schedule in your franchise agreement.
The two main fees a franchisee will pay, then, are the initial franchise fee, and a royalty in the form of a percentage of sales.
Other Possible Fees
You may wish to make provisions for other fees in the franchise agreement. Other fees would be rare and only apply in specific circumstances. For example, if your franchisee, for whatever reason, decided to transfer ownership of the franchise before the agreement expired, and you chose to allow this, you may want to have an additional “re-training fee” for the new franchisee. Alternatively, the franchisee may want your assistance if, for whatever reason, they had to bring in new management. This would be another place a re-training fee might apply.
The one thing you have to remember is that by law, you must inform franchisees of any potential fees before they sign the agreement. In other words, if it isn’t in your franchise agreement, don’t expect to receive the payment.
Collecting and Late Fees
The most common way to collect franchise fees these days is through an electronic banking system or automatic withdrawals. It is your responsibility to specify when you’d like these fees available (weekly, monthly, etc.) and the franchisee’s responsibility to ensure the fees are there at that time.
If the fees aren’t available on time, the franchise agreement should specify the consequences. The most common consequence is an interest charge wherein the franchisee owes you a percentage of the outstanding balance for every day they are late in paying (kind of like when you’re in university and you lose a percentage of your mark for each day you hand an assignment in late).
Your franchise agreement should also specify that these late charges do not constitute your willingness to accept late payments. You also need a clause in your franchise agreement that allows you to terminate the arrangement if the fees aren’t paid, or are consistently late. Think of this as an escape clause in case your franchise arrangement is not working out the way you hoped it would.
A Final Word
Franchise fees are your only income from your franchise. Don’t be afraid to charge them! New franchisees may not understand why they have to pay these fees (especially royalties). Feel free to explain it to them, but once you’ve decided what you want to receive in exchange for your services, stick to your guns. You’re working hard, and you deserve compensation.
On the other hand, your franchisees are working hard too, and they’re entitled to a fair profit. Don’t be unreasonable with your fees, or you won’t be able to attract any serious businessperson to your franchise. Your attorney will be able to help you with this step. You might also want to view some sample franchise agreements online to get a sense of what the standard fees look like.
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This web site will guide you through the steps in franchising your business: what you need to know, how you should go about it, and how to make a success of it. In other words, here is everything you need to know in order to successfully franchise your business and keep it going.
Franchising is not for everybody. Be prepared to put in a great deal of work and effort. However, the golden moment in franchising comes when you’ve completed the preparations and you can stand back, take a deep breath, and watch your business expand under the direction of others. Franchising is a wonderful opportunity. All you need to make it work is a little know-how. And that’s where this
site comes in!
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