Amie Larter: Hello and welcome. My name is Amy Larter and this is the Buying a Franchise podcast. Vital listening for anyone interested in buying or that’s in the process of buying a franchise.

I’m here with franchise business editor, Sarah Stowe to discuss franchise fees. What do you get when you pay franchise fees and is the cost really worth it? These and other questions about fees, how they’re calculated are uncovered in this podcast, giving you a better understanding of why franchise fees are an integral part of a franchise system. Over to you, Sarah. Why do franchisees charge franchise fees?

Sarah
Thank you, Amie. A of a contentious question in a way, but I’m going to take a, I’m going to, I’m going to go the long way around. I’m going to answer this by starting with a franchisee perspective. So it’s important to, for potential franchisees, to think about why they are considering investing in a franchise. For most people, it’s quite simply a shortcut to business. And what I mean by that is much of the work has already been done to set up a business. As a franchisee, you don’t have to create a brand name or develop a product or service. And if you’re buying a household name like a Boost Juice, a KFC or Jim’s Mowing, the brand already has very high recognition among consumers. As a franchisee, you don’t have to work out the best processes that will make your business efficient because the franchise or has already fine tuned the systems. You don’t need to invest time and money in finding the technology, building a training program or worrying about great marketing campaigns.

Now I’ve spoken to many franchisees for whom marketing is not just a totally new element of business, it’s quite daunting. And that’s one particular reason why they are choosing a franchise. Overall, it’s about having tried and tested methods and some guidance on what works for that particular product or service. When you buy a franchise, you are buying a business in a box. The franchisor has invested their time, their money, and taken the risk to create the template, provide the tools, and is going to support you as you build and develop your business. That’s why you pay franchise fees.

Amie
Okay, thank you for unpacking the why, but if anyone is… well, if they’re like me, the big question, Sarah, is going to be how much? Can you outline what fees a franchisee has to pay?

Sarah
How much I can’t answer and that’s the first point that I’m going to say is there’s no set amount for any of the fees. They are going to vary from franchise to franchise and that will be reflected across industries as well. Essentially there are two types of fees. There’s the upfront franchise fee and then there are ongoing fees. So the franchise fee is the big one. That’s a one-off upfront payment that effectively gives you the right to operate the business rather like a licence.

And it will cover some of the franchisors costs for establishing their business, for setting up the training, the systems and the initial marketing that surrounds your business development. So how do franchisors set the franchise fee? Well, there isn’t one particular method, but there does need to be a method that the franchisor can explain how this has been calculated. And of course it will depend on both the industry and how established the business is.

Amie
Mm-hmm.

Sarah
what you don’t want is to find a franchise, franchise always just plucked a number out of mid-air. There has to be some reasoning. There has to be some reasoning about how they’ve made those calculations. If the business, you need to find out. Yeah. If the franchise, if the business is a fledgling franchise, there might be the offer of a discount or a financial incentive to early adopters. They want people on board to build the network. Bigger brands who

Amie
You need to you need to find out about the logic, right? Yeah.

Mm-hmm.

Sarah
who have extensive networks already, they often come with a higher perceived value. They’re offering more commercial opportunities and that understandably can justify a higher franchise fee. Now as a franchise network grows, gaining market share and brand recognition, the value of that franchise increases. So that will lead to higher upfront fees over time. Every franchise will be different and that’s why it’s important to understand what the initial franchise fee will cover.

If, instance, it’s the franchise is described as a turnkey franchise, the franchisee can expect that all the costs for setting up will be included in the overall investment that they’re quoted. If not, there will likely be further fees to pay to get the business up and running.

Amie
Okay, can you give us an idea of what these might be?

Sarah
Well, if you’re setting up a business there, particularly if it’s premises business, there’ll be fit out and there may be an equipment costs. There will probably be training costs, technology fees, inventory costs, marketing and promotional fees, other admin and legal costs. It’s extensive, but not everyone is going to be asking for all those particular fees. It’s going to depend on each individual franchise offer.

For instance, some franchisors charge franchisees for the preparation of the franchise contract. That’s perfectly legal. Others might charge a site selection fee when they’re looking on your behalf for the perfect location. Franchise fees will and should reflect the industry they operate in. So you would expect to pay a substantially higher franchise fee for a hospitality business than you would perhaps say a mobile dog wash.

Amie
Right, and are any of these fees refundable if the franchisee changes their mind?

Sarah
That’s a good question. mean, in franchising, there is a 14 day cooling off period within which a franchisee can change their mind and recoup some of their investment cost. By law, if the franchisee exercises these cooling off rights, the initial fees, the upfront franchise fee must be refunded within a reasonable period. However, I would say it’s never wise to buy a business thinking you can change your mind because even though some costs are recouped, the franchisee will not get back everything that they have invested.

The franchisor can deduct reasonable expenses. So it’s unlikely you would recoup, for instance, the franchisor’s legal costs if they have charged you for those or a training fee. If you’ve undergone the training, you’ve been charged a fee for that. You’re not going to get that back if you change your mind.

Amie
Yeah, which makes sense. So, you know, we need to do our homework first. And you mentioned ongoing fees as well, Sarah. Can you talk us through these?

Sarah
Absolutely.

Sure, so once you start your business you’ll be paying a regular royalty fee to the franchisor. Now this is sometimes seen as contentious but it’s reality of investing in a business that comes with all the added extras. This is how many franchisors derive an income and it enables them to provide ongoing support for the franchise network. Now the royalty could take the form of one or two models, it could be a fixed fee so you know every week or month exactly what your costs will be,or it could be a percentage based fee. That’s typically a percentage of your gross revenue, perhaps between four and 11%.

The price percentage, sorry, the precise percentage will depend on the particular franchise model. Now there are fans and critics of both models, so there’s no one best option. It’s really worth considering whether other franchisees in the system find the royalty model advantageous or restrictive, and then there’s a chance for you to make up your own mind.

On top of the royalty, there may be other ongoing fees. Most common is a marketing levy. Marketing is a crucial element of business building and in franchising, marketing is divided into two aspects. Generally, that’s local area marketing, which is the responsibility of each individual franchisee. And then there’s national marketing. So if you think about the big brand campaigns that promote the brand rather than an individual, you a local business.

Most franchisors, but not all, most franchisors operate a national marketing fund. and franchisees then pay a monthly marketing levy into this. So if you think of it as a collective pool of money that is used to promote the brand for the benefit of the whole network. Now there are specific rules about how this marketing fund can be used. And we have discussed this in another podcast. So if listeners are interested, I suggest you listen to that marketing podcast to get more details.

There might be other fees to pay regularly. For instance, if the franchisor is generating leads for the franchisee through a particular marketing campaign, they might charge a fee per lead. Then there’s technology. mean, fees for technology crop up. If a franchisor is investing heavily in technology that’s boosting efficiencies and streamlining processes, which makes franchisees lives easier, they may recoup these costs through an ongoing.

Amie
Mm-hmm.

Sarah
technology fee. So those are some of the examples that you might come across.

Amie
Okay and wondering if franchisees ever get surprised by unexpected fees?

Sarah
No, well, I can’t, I can’t tell you that they do. But I will say that details of all the fees will be documented in the franchisors disclosure document that a franchise buyer receives. So if franchisees are surprised by some costs, it may be that they have overlooked the details in the disclosure document. It might be that when franchisees come to sell or renew their business, they may have forgotten the details in the disclosure document and are

therefore surprised to find that there are renewal or assignment fees due. And I mean, that’s one of the reasons we’re so keen at franchise business to reiterate the importance of two things, reading the agreement and the disclosure document yourself, and also seeking professional advice, both financial and legal. It’s very easy to overlook a clause or rush through it because you’re busy and you don’t have time to think what it means. And I guess if you’re talking about, you know, the end of term,

of a business, it’s worth refreshing yourself every now and again with kind of the details within the agreement and the disclosure document so you are prepared for what happens next, if you like.

Amie
Yeah and I think so often you speak about Sarah in particular just making sure that you do get that advice because people don’t know what they don’t know right and it’s good to have that advice from people that are you know experts in the franchise space.

Amie: When franchisees come to sell their business, what happens then?

Sarah
Well, if the franchisee is selling their business as a going concern, there will be what’s called an assignment fee paid to the franchisor. Franchisors have to approve an incoming franchisee. If you think about it, they approve you as a new franchisee coming in. If you sell your business, they want to make sure that the person coming in is also going to fit the profile, be someone that they’re happy to have within their brand. So this assignment…

fee is a fee, it’s a notional amount to cover the costs of undertaking the due diligence on the buyer and all the relevant paperwork. Now again, not helpful, but it could be a fixed sum or it could be a percentage of the sale price, perhaps even a combination. And there’s another instance where fees might come up. So when a franchisee’s term ends, their initial contract that they sign up for maybe three years or five years,

and they want to renew their agreement and that’s approved by the franchisor, it’s highly likely that there will be a renewal fee, which again, might be calculated as a fixed sum or a percentage.

Amie
Okay so what happens Sarah if a franchisee fails to pay their due fees?

Sarah
well, there’s usually two reasons why franchisee, why fees don’t get paid. The franchisee is struggling financially, or they decide to withhold the fee as a bit of a protest against the franchisors particular action or their inaction. However, whatever your motive, if you don’t pay your fees, you will be in breach of your franchise agreement. It’s very straightforward and it has legal implications.

Amie
Mm-hmm.

Sarah
The franchisor can issue a breach notice and if that breach is not remedied, a franchisee’s agreements can be terminated. That leaves the franchisee without a business. So, you know, if you’re that franchisee, you could also find yourself in court if the franchisor takes the legal route to recover an outstanding debt. So it’s really important for franchisees who are struggling in their business to communicate this to the franchisor.

A good franchisor will work with a franchisee to find a solution, might be a payment schedule, for instance. At the end of the day, franchisees need to pay their due fees and avoiding the issue just creates mounting debt and animosity. So communication is absolutely key.

Amie
Yeah that makes sense I mean it is what you you signed up for in that agreement. So you’ve talked us through franchise fees, how, why they exist, how they’re calculated, what kind of fees we can expect. Overall, Sarah, do you believe franchise E fees are worth the cost? Any final thoughts on this topic?

Sarah
It’s a personal decision. I’ve, I mean, I think the easiest thing to say is that I’ve spoken with franchisees who were skeptical about the upfront franchise fee until they calculated the costs that they would accrue if they were themselves to set up all the elements that go into a business from the IT systems to a marketing plan. You know, they added it all up and then they realized that there was a lot of value in paying to have all this ready, all in a box, already set up and ready to go.

Of course, the value is both perceived and actual. So it’s perceived in relation to the brand, the intellectual property, and the potential for the business. It’s actual in terms of the tools, the training, and the support that you receive as you establish and build the business. So it’s important to think about what you’re actually getting for that franchise fee. How will it help you get started and support your business?

Sometimes, I would say though, a lower upfront fee might seem appealing, but additional costs like training, project management, administrative fees, they can add up during the initial setup phase. And in some cases, unfortunately, a lower franchise fee could indicate that the franchisor is offering limited support to help get you started. And equally, some franchise fees and ongoing royalties or marketing levies may seem too high.

It’s really important to get an understanding of what you are getting in each of those upfront and ongoing and to speak to franchisees to find out what they think in their business, what’s their thoughts now that they’ve been in the business, have they got value for money. Remembering that franchisors charge ongoing fees so that they can provide ongoing support.

Amie
Yeah.

Sarah
So always speak with other franchisees to find out how they rate the value of the royalty and the marketing levy as well. And I would say that if you seek expert advice from a franchise lawyer or accountant, you’ll also get a clearer idea of the value. So overall, in theory, on paper, yes, absolutely franchise fees are worth money, but you have to look at each individual case as a separate entity.

Amie
Yeah.

Sarah
and really consider the full picture before you make a decision.

Amie
Excellent. Well, thank you, Sarah. In the show notes below, we’ve got links and references if you want to follow this further and get more in-depth information before you continue your journey to buy a franchise. If you’re some way into your franchise search, you might be ready to check out the franchise handbook that’s available on our website, practical tips that can help you navigate the journey smoothly, view franchisebusiness.com.au for more information. We hope you can join us on another Buying a Franchise podcast. Thank you for listening.