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Fees and special offers in franchising

Written by Louise Harris on Monday, 14 February 2022. Posted in Insight, Finance

Franchisors business is franchising, and franchisees will pay fees of some sort to the franchisor. In this article, I explore some of those fees, discounting and guarantees on offer.

Fees and special offers in franchising

Franchisors business is franchising, and franchisees will pay fees of some sort to the franchisor. In this article, I explore some of those fees, discounting and guarantees on offer. 

Check what quoted prices reflect – what additional costs are you going to incur? A good franchisor will work through costs with you and provide a full breakdown. You are responsible for ensuring that you understand the figures and I recommend you use an independent business planner - ideally one who understand the franchise industry model. 

Our franchise fee is £10,000 

This might mean that’s just the price to buy in to the model (brand and operations manual with a license to use them) or might include, for example, some training, marketing, and equipment. 

You’ll need around £100,000 to start this business

Could include some running costs, indicating the funds you’d need in order to get to a profit-making business. Or it may just be the right to use the license. 

No royalty fees 

Will mean that the franchisor is making money from another source, maybe from selling you a unique product for resale, up-front costs or another way.

Reduced/No management Service Fee (MSF) for the first six months 

Seems quite a good offer. MSF, like royalty fees, is usually a percentage of revenue. In the first six months, it is probable that your revenue is low, and reduced fees might ease your cash flow. Make sure you understand what the rate is after this period, and the impact on your business.

Fixed monthly royalty fees

These are a subject of controversy in the industry. On one hand, having a fixed amount each month means that you get the balance of any income. It may mean, however, that there is no driver for a franchisor to support the growth of your business. If you pay a fixed percentage of revenue, the franchisor will be more keen to help you grow, since they will earn more. A simple equation and one worth exploring. 

No up-front costs, pay back as you earn 

This is rare but may be a fantastic opportunity for those who don’t have all the funds available and/or can’t borrow to fund the purchase. As you generate revenue, you will pay an agreed proportion of the fees. What’s important to understand is whether the business can withstand those fees (business plan with an independent person) and what pressures there might be to generate the revenue.

Guaranteed income for the first 6 months

For me, an uncomfortable offer. Often you’ve paid to fund this guarantee in your franchise fee OR you may be given contracts to service that have no long term viability. Income is not profit. Explore these carefully and ensure you’re not buying something that isn’t quite as stated.

Earn £10,000 a month, guaranteed 

This sounds wonderful. Even if it’s true, it’s likely to be revenue. It may be easy to earn income but difficult to generate profit from that.

Marketing Fees 

Are often a percentage of revenue. (see also National) It’s a bona fide fee, but check what it covers and what you can expect. How it is spent and how is it accounted for? Often this money is used to manage a marketing portal, generate design of materials, maintain a brand website – all very sound purposes – for ALL franchisees. 

IT/IS fee 

Businesses may be reliant on bespoke software packages or an operations website. It should be a reasonable cost, but it is again important to understand what you’re getting for your money. Don’t expect hardware (although it’s a possibility) but do expect a service level agreement where business imperative software is involved.

Resale Items

A franchisor may sell you a product/service, e.g. food products, cleaning materials, etc. You may be buying a unique product at a price to enable a profit on resale, or a product that the franchisor is bulk-buying secure a preferential rate. 

Other fees 

How much and for what? If you’re unsure, ask franchisees if there is anything they have been charged for that comes into this category. 

A franchisor needs you to be profitable. You’ll help expand the network of happy, profitable franchisees through stories of your success. Most franchisors are honourable and will do their best to make a franchise that works for you both. Don’t be afraid to ask for the detail – and if you don’t get a straight answer, walk away.

About the Author

Louise Harris

Louise Harris

Louise has been in franchising since 2006 first as a franchisee. In 2010, she became a franchisor, launching the award-winning Wilkins Chimney Sweep franchise. She is a fierce advocate for ethical business-format franchising and has served in on the board of the British Franchise Association, and several committees. She now runs Franchise Projects, completing critical tasks for franchised businesses that help them deliver to ethical franchise standards.

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