How Are Franchise Fees Calculated in the UK?

If you enter into a franchise agreement as a franchisee, you will come across franchise fees as part of your deal. Franchise fees are a cost that you have to pay as part of an agreement. The fees will vary between different agreements, depending on:

• the amount of money that a franchisor expects a franchisee to pay; and
• how the franchise fees are calculated. 

As part of your franchise fees, you will usually have to pay an initial fee, marketing fees, and sometimes, an ongoing franchise fee. This article will explain some points to keep in mind if you are considering a franchise agreement and want to know more about franchise fees.

Franchise Fees

As a prospective franchisee, you can expect to pay costs concerning your franchise agreement. You may be wondering how much the franchise agreement will cost. 

The first point to remember is that the exact fees you can expect will vary between different franchisors. You can expect to pay, at the least, an initial franchise fee followed by ongoing royalty fees. Royalty fees are usually either monthly or yearly costs.

What is the Initial Franchise Fee?

The initial franchise fee reflects the amount of money that you pay to use the franchisor’s brand, trade mark, or other intellectual property. The initial fee will also usually cover the training that your staff will receive as part of the franchise agreement, as well as access to the business expertise of the franchisor. The business expertise can take the form of advice, access to a handbook or manual, or contact with members of the franchisor’s business.

The amount of money you can expect to pay will depend on how big and successful the franchisor is, and often, how much the franchisor is trying to expand their business. For example, the British Franchise Association estimates that the average initial franchise fee is around £40,000. 

How Are The Ongoing Fees Structured?

Your ongoing fees are the fees you must pay weekly, monthly, or yearly as a continuing fee to the franchisor. This will be structured in different ways, such as a set fee or a percentage of sales.

The franchisor will document the ongoing fees structure in the franchise disclosure document and the franchise agreement, so it is a good idea to do your research before agreeing to start a franchise business. 

If the fee is a percentage of sales, you should be very cautious of how that will impact your business. A percentage of sales will be more than a percentage of profits. This can hurt your profit before you have even started calculating it. 

Finally, you should be cautious of a franchisor who tries to make it so that they can claim the ongoing fees earlier. This can also hurt your business heavily, and the franchisor may abuse this.

What Other Costs Can I Expect in a Franchise Agreement?

Besides the initial and ongoing fees, you may also come to more financial agreements with the franchisor, depending on the details of your franchise agreement. It is usually a good idea to get someone with franchise experience if you plan to negotiate the terms of the franchise agreement. 

Some franchisors may charge unexpected costs, such as fees for the correct uniform as part of the franchise business. You may also have to make minimum stock purchases as part of the agreement, which can also be costly. 

In sum, you should make sure that the franchisor clarifies all costs you must pay. It is usually a good idea to try to negotiate some of those terms, especially if you have expert franchise or legal advice on your side.

Key Takeaways

Franchise fees will usually involve an initial fee, followed by ongoing costs and royalties. You may also have more obligations that require you to make payments, such as uniform compliance or minimum stock orders. Your franchise fees will usually be in the franchise disclosure document and franchise agreement, so you should make sure that you have read this thoroughly and negotiated points in your favour if you can.

If you need help with franchise fees, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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