Some franchisors may simply think that they should mimic the initial franchise fees and royalty fees that their competitors charge, however they should resist the temptation. From a business perspective, franchisors should want their fee structures to be competitive - but different product and service price points across different systems can translate into different fees being charged to franchisees.
Generally, franchisors will charge an initial franchisee fee payable on the franchisee signing the franchise agreement. Franchisors often assume that this is straight profit for them, but the typical business reality is that the franchise fee should be an amount that compensates the franchisor for its own administrative, legal and accounting costs to grant the franchise, assist in getting the new franchised location operational and provide any agreed-upon training.
Most franchisors will also charge a monthly royalty fee, which is typically reflected as a percentage of the franchisee's gross sales. An advertising or marketing fee is common to be charged to franchisees, usually by way of a franchisee contribution to a franchise advertising fund, which is administered by the franchisor for the benefit of the system as a whole.
Some other fees, which may be chargeable by a franchisor, include a sublease administration fee where a franchisor subleases the premises to the franchisee; a software maintenance fee; an ongoing training fee; and, perhaps, a waste diversion fee.
Chad Finkelstein is a franchise lawyer at Dale & Lessmann LLP Toronto and can be reached at [email protected] or 416-369-7883.
from Western Investor, April 2011
