What does my initial franchise fee cover?

Investing in a new franchise opportunity is a major decision, and understanding what the initial franchise fee covers is essential.

The fee can be substantial (around £40,000 on average), but it is designed to reimburse the franchisor for costs incurred and provide you, the franchisee, with the tools and support you need to start successfully.

How do franchises use the initial franchise fee?

John Pratt, senior partner at Hamilton Pratt, explains: “The initial fee is sometimes split between a licence fee for the rights to operate as a franchise and a package fee for equipment, stock and other items supplied by the franchisor.”

He adds that you’ll usually pay this initial fee when you sign the franchise agreement, before you receive any training.

“The purpose of the initial fee is to reimburse the franchisor the cost it incurs in recruiting the franchisee, providing initial training and supplying the elements forming part of the initial package.”

Shelley Nadler, legal director at Bird & Bird, highlights the variety of ways the fee supports franchisees. This often includes:

● training in the franchise system for the franchisee (and possibly their employees)

● advice and assistance on the various elements necessary to start the business

● provision of the franchise operational manuals

Depending on the type of franchise, Nadler notes that initial assistance may also include premises selection and design and fit-out. For van franchises it may include vehicle leasing and livery application.

In some cases, the fee includes a turnkey package or the cost of a marketing launch. She adds, “The initial fee also contains an element that’s attributable to the value of joining the franchised network and the strength of the name and goodwill associated with it.”

What will I receive in return for my initial fee?

Brian Duckett, former chairman of The Franchising Centre, lists the following benefits you may receive after paying your initial fee:

● the rights to use the name and operating system

● additional licences to use various software programmes and ICT communication processes

● use of store designs and layouts

● an appropriate amount of training for the appropriate staff

He adds: “Put simply, the upfront fee is what you pay to ‘get into the game’ and also covers the benefit of not making all the mistakes that the franchisor has learned from during however many years they have been developing and operating the business.”

Should franchisors profit from the initial fee?

Vicky Wilkes, head of legal at Aston Villa Football Club, highlights the importance of ensuring the fee covers actual goods and services.

“The franchise fee is typically the amount that a franchisor will charge to recover its initial costs in appointing the franchisee. It is, however, important that the franchisor doesn’t use the franchise fee as an opportunity to make pure profit. It should relate to actual goods or services provided.”

What about other costs?

Remember that the upfront fee is not the total set-up cost. Aside from the initial fee, you may need to pay for:

● premises

● equipment and vehicles

● design and implementation of building works

● shop fitting

● initial stock purchases

● staff recruitment and training

● various other items

Vicky Wilkes notes that the franchisor will also expect you to pay an ongoing fee “for the ongoing use of the franchisor’s goodwill, brand reputation and the established brand name and/or trademarks.”

How can I clarify what my initial fee gets me?

Across all our experts, the advice is consistent: always ask the franchisor for a clear breakdown of the fee. Pratt advises: “Precisely what the initial fee includes will depend on the terms of the franchise agreement, so [...] look at the proposed agreement carefully.”

Nadler emphasises the importance of transparency. “If you are in any doubt as to what the franchisor is including in the initial franchise fee, ask them to provide you with a breakdown. This should illustrate how they’ve calculated the fee and allocated it between the various elements.”

Wilkes adds that it is sensible to confirm in writing exactly what the fee covers, including circumstances in which any part might be refunded.

Conclusion

Investing in a franchise involves a significant financial commitment, but understanding exactly what the initial fee covers and what support and assets you receive in return ensures that the investment is based on real value rather than unnecessary profit.

By reviewing the agreement carefully and asking the right questions, you can enter the business with confidence.