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How is a franchise fee calculated?
There are a number of fees charged by franchisors, but generally they fall within three categories: the initial fee, continuing fee and marketing fee. The continuing fee and marketing fee are normally calculated 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 eight per cent and the marketing fee is two per cent. The initial fee is paid by franchisees on entering into the franchise agreement. The purpose of the initial fee is to reimburse the franchisor all of the costs it will have incurred recruiting and training the franchisee. In addition, if the franchisor supplies an initial stock of stationery, equipment, fixtures and fittings, or any other items, as part of the franchise, the initial fee will generally cover these aspects. Sometimes the initial fee is broken down as a licence fee and a package fee - the package fee relates to the cost of all the goods and services the franchisor provides. The initial fee should generally not contain a profit element for the franchisor because otherwise there is a risk that the franchisor’s business is the sale of franchises, rather than doing everything necessary to ensure that franchisees are successful. Secondly, the initial fee should not be out of kilter with the likely profits to be earned by a franchisee.
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