You may have heard a lot being said about franchise fees, but may not understand what they mean, breaking this down to most comprehensive explanation, franchise fee is simply a fee (in most cases, flat fees) which is paid to the franchisor by the franchisee, after having signed the franchise agreement.
Without the payment of the franchise fee, the franchisee is unable to do business with the franchisor. In other words, the franchise fee gives the franchisee the privilege of operating under the cover of the franchisors brand name and system.
However, apart from the initial franchise fee paid by the franchisee, there are several other franchise fees that franchisees are required to pay. Some of these franchise fees include the continuity fee, Advert Royalty fee, and an Ongoing Royalty fee among several other fees paid by the franchisee.
The franchise fees usually vary from investor to investor, but in all cases, the franchise fee is regulated in such a way that they are not so high as to discourage interested franchise candidates from participating.
The Types of Franchise Fees
This article shall be concentrating on the types of franchise fees demanded by franchisees; beginning with the Royalty fee
These are fees are usually measured in percentage of the total business sales realised within a particular period as agreed upon by both parties. The payment period may vary, as in most cases, these periods may either be monthly, or weekly, whatever the case, these fees are mainly charged based on the total sales realised within the chosen specified periods.
Most franchisors have their own unique period or timeframe set for the payment of these royalty fees, and also, the percentages do vary from franchise to franchise.
The advertising fee is a type of fee paid by the franchisee which goes into a fund used primarily for advertisement by the franchisor. Its frequency of payment is also same as the royalty fee, and is also calculated from the percentage of sales. The advertising fee is usually managed by the franchisor in the provision advertising for the products and services of the franchise as the need arises.
This type of franchise fees consist of both the advertising fees and the royalty fees. However, total fees are mostly varied and not fixed from franchise to franchise. In other words, these fees are never uniform in their structure, but vary from one franchisor to the next.
Part of the reason total fees vary among franchises is partly because of the brand value. The higher the brand value, the higher the total fees. Also, the type of services provided by the franchise and the industry to which these franchises fall under also contribute to the varying total fees.
The ongoing fee charged by franchisors to their franchisees are fees which are usually charged based on the percentage of sales and receipts accruable to a given franchise, ongoing fees are also in the form of fixed dollar amounts and also the estimated amount of transactions a franchise outlet handles.
Whatever the case, ongoing fees are charged by all franchisors to all their franchisees to ensure that the brand makes a profit from the operations of its franchisees, at the same time, supporting the franchisees to also succeed.
Territory Based Fees
There are also territory based fees, where the franchisee pays a fee to maintain its exclusivity of operating with a particular territory. This fee enables the franchise not to have a situation where larger franchises operating under the same brand name cannibalize the smaller franchises.
Unnecessary competition is avoided by ensuring that franchises operating within a particular territory are given a chance to thrive without the larger ones driving the smaller franchises out of business.
Real Estate Fees
Real estate fees are fees paid by franchisees for franchise outlets or structures occupied by the franchisee which belong to the franchisor. In other words, these are similar to rents being paid on such structures.
These fees cover the costs incurred by the franchisor in establishing or erecting such outlets. The franchise agreement specifies how often these fees will be paid by the franchisee.
Contract Based Fees
The contract based fees are fees which include other aspects like renewal fees, transfer fees, among several other contract based fees. Within the contract, there are requirements for fees to be paid for certain purposes, such as when the contract between the franchisor and the franchisee expires, and the franchisee is interested in renewing the contract. These fees have to be paid in order to obtain permission to continue operating under the brand name.
Other contract based fees such as technology fees charged for using the technology provided by the franchisor are required to be paid. This type of fee cover everything put in place by the franchisor to ensure the smooth running of the franchise under its franchisee. These are means where the franchisors recoup their investments and also make profits.
All of the above franchise fees discussed above are varying fees collectively called the franchise fee.
The franchise fee is primarily a fee charged by the franchisor for using its brand name, systems, its business secrets, among several other benefits associated with this usage.
The relationship within the franchisor and franchisee involving these fees are that of mutual benefit, with both parties benefitting from business with each other.