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As A Franchisee, What Ongoing Fees Must I Pay To My Franchisor?
In order to finance the continuing services and back-up provided to franchisees, the franchisor has to secure a regular flow of income. This is normally achieved by charging management service fees or royalties on continuing fees.
In the case of a product distribution franchise, there may also be a mark-up on the supply of products and in most franchises an additional advertising contribution.
Most franchisors charge a straight percentage fee based on the gross revenues of the franchisee. Higher fees can be payable where franchisors carry out administrative functions for franchisees such as invoicing customers, collecting payments and debt collection or where the franchisor finds customers for the franchisee.
Although not so common, some franchisors establish a fixed fee or require payment of a minimal level of fees. Fixed fees can benefit a franchisee if their level is not too high. Adjustments may need to be made at regular intervals to take into account inflation or to reflect growth.
In most cases, the franchisor will undertake responsibility for advertising, promotion and public relations for the network. It’s the franchisor’s obligation to develop and maintain the reputation of the brand and many franchisors set up a central advertising and marketing fund to exploit the national corporate image of the franchise network.
The franchisor will make a charge to each of its franchisees of a sum usually calculated as a percentage of the franchisee’s gross income, which is paid into the advertising and marketing fund. The sum of all these contributions is spent by the franchisor on advertising and marketing on behalf of the network.
Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.
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