Four Ongoing Costs for Franchisees

Costs can vary from one franchise to another. The amount a franchisor might expect you to pay on an ongoing basis can depend on many factors. These factors include the age and size of the franchised brand, its marketing and advertising needs, and the amount the franchisor expects in exchange for access to its brand name and trademarks. It is crucial to factor ongoing costs into your decision to accept a franchise opportunity. This article will explain the ongoing costs franchisors typically expect their franchisees to pay and any further costs associated with maintaining a franchise location. 

The Ongoing Fee Structure 

The franchisor will note the overall fee structure within the franchise agreement. You should read this carefully and understand how and when the franchisor expects you to pay ongoing fees, including the royalty and maintenance fee. 

There are no requirements for how a franchisor must set out the fee structure. The structure can differ and franchisors might charge each ongoing fee differently. For example, they might charge the marketing fee at a weekly or monthly flat rate, but they might charge royalty fees as a percentage of your overall monthly turnover. 

1. Royalty Fees

You will pay ongoing royalty fees to maintain your rights to the franchisor’s branding, such as their brand name and intellectual property. The royalty fee also ensures your access to the franchisor’s ongoing training and support. 

Royalty payments are a primary way that franchisors earn money. However, they might reinvest some of these funds into their brand. 

2. Marketing Fees

Franchisors typically require their franchisees to pay an ongoing marketing fee. This fee, along with similar fees from other franchisees, contributes to a marketing fund. The franchisor will use this fund to pay for marketing campaigns to grow awareness of the franchised brand. 

In addition to the franchisor’s marketing fee, you must also budget for local advertising campaigns. You should ask your franchisor for marketing assistance and advice to develop these campaigns and attract new customers to your particular location. 

3. Rent Payments or Maintenance Expenses 

In addition to the fees you will pay to the franchisor on an ongoing basis, you will also need to factor in expenses such as rent. Rent will not apply to mobile businesses, but you may need to consider different factors, such as:

• maintenance and repair costs; and 
• fuel expenses. 

The franchisor might own or lease premises you can use for your franchise business. If they can provide premises, ensure you share a written agreement. This agreement can form part of the franchise agreement or a separate agreement. Alternatively, you may seek suitable premises and sign a separate lease agreement with a landlord. 

Before entering any lease agreement, ensure you fully understand the contract terms you share with the landlord. It is a good idea to seek legal advice about the terms of a lease agreement before signing it. You should also ensure that the terms of the lease agreement align with certain aspects of the franchise agreement, such as its duration. 

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4. Operating Costs

Another ongoing cost relates to maintaining your business’s operations. Operating costs vary significantly across industries and can depend on each business’s model, format and needs. 

Operating costs can include the following: 

• salaries; 
• utilities; 
• stock; 
• insurance; and 
• IT costs. 

Key Takeaways

Prospective franchisees should factor ongoing costs into their business plan and establish a complete financial forecast. You should also remember that the franchisor will expect you to pay an initial fee upon signing the franchise agreement. 

Franchisees typically owe their franchisors several ongoing fees, including royalty and marketing fees. You will also need to consider further ongoing expenses such as:

• rent payments;
• maintenance and operating costs; and
• local marketing costs. 

The level of ongoing fees you will pay will significantly vary depending on the nature of the franchise opportunity and the type of business you will run. When determining the financial implications of a franchise opportunity, it can be a good idea to speak to the franchisor and their existing franchisees and seek independent advice. 

You should read the franchise agreement carefully to understand the franchisor’s fee structure. For example, the franchisor may charge one cost as a flat rate and the other as a percentage of your turnover. The franchisor may also require payment of each fee on different schedules, such as weekly or monthly. 

If you are an existing or prospective franchisee and would like legal advice regarding ongoing costs, 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.