How do franchisors decide the cost of a franchise?

If you’re considering buying a franchise, it’s key that you understand how franchisors calculate their fees. The cost isn’t arbitrary – franchisors use a structured approach to ensure the franchise system is sustainable and fair for both sides.

What factors determine a franchise’s cost?

John Pratt, senior partner at specialist law firm Hamilton Pratt, explains that there are several components to a franchise’s cost. “First there is the initial fee a franchisee pays. Then there will be continuing fees. Normally the management fee and the marketing fee are approximately 10% of a franchisee’s turnover.

“However, a franchisor should reduce this percentage if they oblige you to purchase products or services from them or a nominated supplier and receive commissions, discounts or retain a mark-up.”

Essentially, franchisors need to balance the fees they charge with the franchisee’s potential to generate profit. “There isn’t much point in the franchisor charging an initial fee of £100,000 if franchisees will only make £10,000 a year from the operation of the franchise,” Pratt notes.

How do franchisors calculate the initial fee?

Franchisors should include all their costs in this calculation, not just training or materials. “Recruiting franchisees and going through the process of ensuring they are the right people for a particular franchise is expensive,” explains Pratt.

“Many franchisors calculate this element to be over £5,000. The initial fee should reimburse the franchisor all these costs.”

The initial fee is not intended to generate profit for the franchisor. Instead, the focus should be on supporting the franchisee’s success rather than selling franchises.

How are ongoing franchise costs determined?

Once the franchise is running, ongoing fees come into play. Pratt explains: “Franchisors normally calculate the continuing fee and marketing fee as a percentage of the franchisee’s turnover (which, for this purpose, includes sums receivable, but not received by the franchisee).

“The average in the UK for the continuing fee is 8% and the marketing fee is 2%.”

These ongoing franchise costs ensure the franchisor can continue providing support, maintain the brand and fund marketing initiatives that benefit the entire network.

Conclusion

Franchisors calculate costs carefully, taking into account recruitment, training, support and ongoing network management.

A transparent fee structure is crucial for you to understand your financial commitment and assess whether the business is viable. By knowing how fees are calculated and what they cover, you can make an informed decision about franchise opportunities and avoid surprises.