What kind of fees can a franchisee be expected to pay under a standard franchise agreement?

Shelley Nadler writes:

There are two main types of franchise fee paid to the franchisor in a franchise arrangement: the initial franchise fee paid on entry to a franchise, and the on-going fees usually paid weekly or monthly. The franchise agreement should clearly set out all fees that are payable by the franchisee.

The initial fee is payable on entering into the franchise agreement and covers a range of services provided by the franchisor to help the franchisee establish its franchise business and an element which is attributable to the value of joining the franchised network and the strength of the name and goodwill associated with it. In some franchise networks the initial fee includes an initial package of equipment and/or products comprising all the initial requirements of the franchisee’s business.

The on-going franchise fee, often referred to as a “service fee” or “management service fee” or “royalty”, is paid in respect of the on-going support and advice and assistance that the franchisor provides to the franchisee during the term of the franchise agreement. This is usually a percentage of the franchisee’s turnover but it some cases it is a fixed amount. In the case of a product distribution franchise there may also be a fee that is a mark-up on the supply of products.

In many cases the franchisor will undertake responsibility for marketing for the network and will set up a central marketing fund to exploit to the full the national corporate image of the franchise network, as the provider of goods and/or services. The franchisor will require each franchisee to pay a marketing fee into the marketing fund and the sum of all of these contributions is spent by the franchisor on advertising and marketing on behalf of the network. The marketing fee is usually calculated as a percentage of the franchisee’s turnover and is paid in the same way at the same time as the on-going fee.

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.