Franchise Fees

When evaluating a potential business opportunity, business owners, investors and lenders will want to know about all on-going fees.  These fees are in addition to many initial costs (e.g., leasehold improvements, legal costs, furniture and fixtures, etc.) you will occur in starting your business.  You must understand these and their impact on your ability to make the expected earnings from the franchise business.

The good news is all of these fees must be fully disclosed to you in the Uniform Franchise Offering Circular (UFOC) under Items 5, 6 and 7.  There are three primary fees: initial franchise fee, royalty fee and advertising fee.

Initial Franchise Fee

The amount varies (sometime significantly) among franchise companies.  It is paid by the prospective franchisee when the franchise agreement is signed.  It is documented in Item 5 of the UFOC.  It is typically a one time fee.

The initial franchise fee essentially pays for the license to use the franchisors' trade name, mark and other identifying logo and the right to use the franchisors' system.  It may include the cost of training, location and site review, and other start-up services provided by the franchisor.

All of this information can normally be found within the UFOC under Item 5, Item 6, Item 7 and Item 11.

Royalty Fee

The royalty fee is an on-going payment that starts once the franchise business is up and running. Typically, the fee is based upon a percentage of the ‘gross revenue’ or sales of the franchisee after deducting sales taxes. The average royalty fee percentage is 6%.  Sometimes it is a flat monthly fee, or a minimum purchase requirement of the franchisors goods that the franchisee sells from its franchised location. Therefore, you need to know:

• How much the royalty fee is?
• How often it is to be paid?
• Is it a percentage or fixed amount?
• If a percentage, what is it based on?
• How does it compare to other franchise systems?

This information will be detailed in Item 6 of the UFOC as well as in the franchise agreement.

Advertising Fee

The advertising fees are used to advertise, market and promote the franchise system nationally. Normally an advertising fee is based upon a percentage of gross sales or net sales. They typically range from 1% to 5% of gross sales. Item 6 of the UFOC will give the exact percentage of amount.

The fees are often put into a regional or national fund to be used for either regional or national marketing or advertising campaigns. Item 11 of the UFOC will outline what you get in exchange for your fee.

Sometimes franchisors early in their development may not collect an advertising fee as they would not expect to achieve any real benefit (i.e., without national distribution an advertising campaign would have little value).  You need to know:

• What the fee is?
• Is the same fee paid throughout the network?
• How it compares with other systems?
• What you get for your money?
• If the franchisor can spend the fee on how they see fit? Will an advertising fee benefit the system? Or your franchise?

Other Fees

Franchisors may charge some, all or none of the following fees.  Others may reduce their initial franchise fees (in an effort to appear lower in cost vs. other franchises) while charging many additional fees to cover their expenses.

• Training fees, initially and on-going
• Consulting fees
• Site selection fees
• Leasing fees
• Blueprint and specification fees
• Grand opening fees
• Auditing fees
• Accounting fees
• On-site management fees
• Application fees
• Exclusive territory fees
• Renewal fees
• Transfer fees

Carefully review item 6 of the UFOC for an outline of all additional fees

Deposits

Most franchisors will require the initial franchise fee be paid-in-full at the time of signing the franchise agreement.  Be aware that under the U.S. franchise rule, franchisors cannot take any money, including deposits, until the prospective franchisee has had the UFOC document for a minimum of ten (10) business days. If after the ten business days, the franchisee is interested in a specific territory, the franchisor may take a deposit to hold the territory during the time the prospective franchisee completes their evaluation of the franchise system. In some cases, this type of deposit may be non-refundable in order for the franchisor to lock up the territory for the specified period of time as requested by the prospective franchisee.

Unless the deposit is for a nominal sum, or the franchisee gets something for their money, such as a specific territory reserved for them, the deposit should be refundable. Franchisees must make sure that before they part with a deposit they receive a written confirmation from the franchisor that: if the franchisee goes ahead and signs a franchise agreement, the amount of the deposit will be credited towards the payment of the initial franchise fee; and the precise circumstances under which it is non-refundable / refundable with the appropriate time limits.

The Importance of the UFOC

The UFOC includes an unexecuted copy of the franchise agreement that the franchisor uses for all franchisees within it system. Under most conditions, this agreement is not negotiable. The franchise agreement should mirror the disclosure section in fees that a franchisee will have to pay to the franchisor, location, training, assistance, terms of the franchise, operating guidelines and more detailed information on the relationship between the franchisor and the franchisee.

Beyond the understanding of fees, it is critically important that you read this document in its entirety and make notes where you have any questions on the terms or obligations you will be required to operate under. In addition, be sure to have a qualified franchise attorney review the UFOC as well.  Be sure to have all of your questions answered prior to making a decision to invest in any particular franchise.