What Fees Do I Need to Pay For My New Franchise?

If you are a new franchisee, you may or may not yet understand your obligations regarding franchise fees. Under the franchise agreement, there are certain costs that you must pay specifically as a franchisee. This can include an upfront fee as well as royalty fees. Understanding your payment obligations is vital to having a successful franchise and good profit margins. This article will explain some of the typical costs associated with a franchise agreement and provide some guidance on how you may calculate these costs.

The Franchise Fee

The franchise fee (or the initial fee) is the upfront fee you pay to enter into the franchise agreement. In other words, this is the price that you pay to be able to use the franchisors: 

• brand;
• image; 
• resources; 
• business concept;
• intellectual property; and 
• in some cases, physical property. 

The size of the fee will vary. However, it usually represents the: 

• cost of setting up the franchise business; 
• level of support that the franchisor will offer you; and
• value of the franchise brand. 

As a result, a lower franchise fee does not necessarily mean you are getting a good deal. Alternatively, it could mean that the franchisor will not offer you high support levels. To ensure you know what you are entering into, it is a good idea to seek professional legal advice when interpreting the terms of the franchise agreement. 

Franchise Start-up Costs

Depending on the business you will be running as part of the franchise, you may also have start-up costs to pay. For example, if you are running a food business, you may have to pay an initial amount to get the business running. This may include fees for:

• supplies; 
• inventory; and 
• equipment. 

Furthermore, your franchisor may insist that you obtain your start-up equipment from a specific retailer. As a result, you should be aware that you may need to pay an initial upfront cost to help you start the business. Your franchisor may give you an estimate as to how much this will cost. Moreover, it would help if you asked them for their advice. After all, it is their business model.

Working Capital

You may also want to have a reserve of working capital. Working capital refers to the amount of money you set aside to ensure that the business has enough cash to keep going if you do not make a profit early on. As most franchise businesses do not profit from the very beginning, you may have cash flow difficulties if you do not have a healthy reserve of working capital. Additionally, you can use this capital to pay for supplies for your business. 

Legal and Business Advice

You may also want to set aside some money if you wish to pay for legal advice in the due diligence phase before entering into the franchise agreement. Alternatively, you may decide to get a franchise specialist lawyer to review the terms of your agreement. Similarly, you may want to hire a franchise consultant before agreeing if you are unsure whether the business will be profitable for you. 

Ongoing fees

Ongoing fees, sometimes known as franchise royalty fees, are the amount of money you pay the franchisor regularly. This will usually occur every month. 

Royalty fees can follow various structures. For example, some franchisors might want to take a percentage of monthly earnings as a royalty fee. Others will want to take a set amount every month, which does not change depending on how much profit you make. 

If your franchisor wants to take a percentage or a set fee, you will want to check whether they are taking money from your revenue or your profits. If they are taking from your revenue, you may encounter cash flow problems in the future, as your royalty fees can become very burdensome. The exact details of your payment obligations will be in your franchise agreement and within the franchise disclosure document. Paying an ongoing royalty fee is an essential aspect of the franchise and will bind you during your agreement. As a result, it is important to ensure that you have negotiated a reasonable price for your franchise business. 

Key Takeaways

As a prospective franchisee, you will want to make sure that you are familiar with the costs of entering into a franchise agreement. Typical franchise fees include: 

• payment to the franchisor, typically an initial fee and then ongoing royalty fees;
• money to cover start-up costs; 
• legal and business advice costs; and 
• working capital to sustain your business before it starts turning a healthy profit. 

If you are unsure whether the payment terms of your franchise agreement are beneficial for your business, LegalVision’s 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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