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Why does a franchisee have to pay a percentage of their turnover to the franchisor?

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Why does a franchisee have to pay a percentage of their turnover to the franchisor?

Author: Vicky Wilkes

answered by Vicky Wilkes

Senior Associate at Squire Patton Boggs (UK) LLP

Charging a percentage of turnover is a common way for a franchisor to obtain payment in return for granting the right to operate the business to a franchisee.

A franchisor will want to ensure a return on its investment and will want to incentivise its franchisees to continue to develop the business. A turnoverbased royalty is an effective way of doing this.

Before taking on a franchise, a franchisee should always thoroughly investigate the payments due under the franchise agreement, including whether the franchisor can increase the payments due from the franchisee.

In addition to any turnover royalty, a franchisee can also expect to pay an initial fee on signing the franchise agreement. A franchisee may also be expected to pay an advertising fee, which will be collected separately from the above fees and be used for advertising campaigns to promote the franchise generally.

Vicky Wilkes is a senior associate at law firm Squire Patton Boggs (UK) LLP, specialising in both domestic and international franchising.

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