What does a franchisee pay a ‘management service fee’ for?

Franchisors generally receive three fees. First an initial fee, which should not contain any profit for the franchisor. This seeks to reimburse the franchisor the cost of granting the franchise. According to recent research, these costs can be very high.  Secondly, an advertising/marketing levy of usually about two per cent, which can only be used for marketing purposes, and, thirdly, a management service fee of usually about eight per cent. Sometimes this fee is referred to as a ‘service fee’, ‘continuing fee’ or ‘royalty’.  The management service fee aims to reimburse the franchisor the costs in providing the continuing services to the franchisee, which are set out in the franchise agreement. These services will relate to monitoring the performance of the franchisee, continuing research, developing the franchise, organising meetings and so on. The management service fee also contains the franchisor’s profit. Indeed, unless the franchisor requires franchisees to obtain products or services from the franchisor, or its nominated suppliers, and receives a mark up, kick back or rebates from the suppliers, the management service fee is likely to be the franchisor’s only source of profit.