Ongoing franchise fees
The ongoing fees may be termed management service or royalty fees. This is usually calculated around 25% of the business’s net profit, or a percentage (usually up to about 6% or 8%) of gross turnover. This monthly fee is for the continued use of intellectual property, as well as administrative and management services provided by the franchisor.
Monies paid for marketing should go into a separate, independent fund which is managed by the franchisor in consultation with the franchisee. This sum is usually about 3% of turnover.
What does the upfront franchise fee cover?
In a turnkey franchise situation – where the franchisee purchases a complete store – the upfront fee includes fixtures, fittings, equipment, opening stock and the cost of setting up the store. The cost of training is also taken into account, along with the franchisor’s management and legal costs and the goodwill element of the brand, which will be more expensive in developed franchise systems.
The upfront fee of an operation which is not a turnkey franchise will cover similar costs, but it may be broken down differently. You may, for example, spend the same on purchasing stock and setting up the store, but this money will be spent with suppliers and possibly not directly with the franchisor.