The 9 potential franchising fees you need to be aware of
When you’re considering investing in a franchise, naturally it’s crucial that you have the complete picture of the business to help you with your decision making.
Under the Franchise Code your potential franchisor must provide you with the relevant documentation about their business model and financial information relating the franchise, before you enter into a franchise agreement. This can help you make an informed decision about whether the franchise business is right for you. Yet of course, there’s much more to the story.
It’s vital that you get a firm idea of your associated costs within your seven (7) day statutory cooling off period after you enter into a franchise agreement. That way, if you discover any fees you weren’t aware of that will change your investment decision, or if you decide that the franchise business isn’t right for you, you’ll still have the opportunity to change your mind after you sign. Note however that you may still lose your application fee (see below) in this circumstance.
Here’s what you need to take into account before you buy into a franchise – to make sure you don’t make a small fortune from franchising by starting with a big one!
1) Franchise fees
Let’s start with the most obvious fee. Most (if not all) of the time, the franchise group you're buying into will charge you a franchise fee to be part of their operation.
Yet the details of this fee can be far from straightforward. You should ask the franchisor whether the fees are charged monthly or annually. And how are they calculated? Are they changed as a percentage of sales; as a fixed amount; or is it a base amount + a percentage of your sales?
Does the franchise fee increase annually? And what does the “franchise fee” actually include? Will you be obliged to wait for your trading figures for the first year of trading before paying your annual fee?
You can see how it’s worthwhile getting answers to all of these questions before you agree.
2) Administration fees
The second fee to be aware of is the franchisor’s so-called “admin fee”.
Some franchises may charge you an “application fee”, simply to consider your application to join the group. In the event that you’re unsuccessful – or you change your mind during the cooling off period – this admin fee may be non-refundable.
Franchise admin fees may sometimes – but not always – include things like marketing fees and legal costs. So before you agree to any administration fees, ask to see a breakdown of what they actually include. That way you’ll know exactly what you’re paying for, and can factor them into your budget more accurately.
3) Marketing fees
Another common fee in franchising is the marketing fee. Once again, find out whether any marketing fees charged are ongoing or a once-off fee.
Remember too that a franchise group’s marketing fee only covers activities that they undertake for you. That means you might also be liable for another batch of marketing fees, for example from the shopping centre where your business is located. Yes... that’s two lots of marketing fees payable by you, the franchisee. Welcome to the wonderful world of business ownership!
4) Training fees
When you’re starting out in a new business, you’ll understandably need training in all the new skills you’ll require. In many cases, that means paying for training from the franchisor to use their administration systems, to learn how to run their business model, or maybe to learn how to make the product you’ll actually be selling.
You’ll usually need to complete this training before you begin trading – and again, these training fees are potentially non-refundable depending on your franchise agreement. So be sure you fully understand your obligations before you commit to paying these costs.
5) System setup costs
Think about the software your new business will depend on. Setting up the type of reliable IT system you’ll need can amount to a serious cost – and note also that your franchisor may have a proprietary system, or standard software (such as MYOB) that you’ll be obliged to use.
If you’re buying into a retail franchise, there may be specific standards for the type of cash register you must use. And if you’re working with food, your franchisor may stipulate that you have to use a particular type of weighing equipment, for example.
All of these requirements will affect your costs.
6) Legal fees
Once the franchisor has provided you with all the necessary documents under the Franchise Code and the franchise agreement, it’s still really important that you get your lawyer to double check to make sure you have been provided with everything you need to comply with the relevant legislation.
To help you keep control of your legal costs, it’s a great idea to hire a lawyer (such as McCarthy Durie Lawyers) who will give you an estimate of your costs before you begin.
Here’s another crucial point to note – it’s very common that you as the franchisee will be responsible for paying not only your legal fees, but the franchisor’s legal fees as well. Something to look out for when you’re budgeting for your legal costs.
7) Financial costs
If you’re starting a new business, you most likely won’t have the full amount of capital you’ll need – which means you’ll be relying on obtaining finance. And of course, this comes at a price.
Make sure you get an estimate for your financial costs, such as interest, fees, and any other charges from your financial institution.
8) Leasing costs
If your franchise business will be operating from a leased premises, there are a wide range of costs that may apply. There will be costs involved in preparing the lease – plus you might also be liable to pay the landlord’s leasing costs!
Your lease may also need to be registered with the State Government body in charge of registering leases and property interests on the title of land – again with, you guessed it, a lease registration fee for you to pay.
Other potential leasing costs to be aware of include survey plan fees (if you’re building a new place of business), and mortgagee consent fees (which are often required if a mortgage is registered on the property you’ll be leasing).
See our dedicated blog post for more issues to be aware of with your lease.
9) Other franchising costs to be aware of
As you can tell by now, pretty well any fees that any of the concerned parties pay, can end up being payable by you as the franchisee.
For example, depending on the type of business you may need to buy stock to get your business up and running. Is this supplied by the franchisor? At what cost?
If you’re setting up a new retail business, you’ll likely need a fitout of your business premises, with all its associated costs. The landlord will probably require you to take out sufficient insurances as a condition of the lease – which will also need a security bond.
You should also consider your ongoing staffing and wages costs that are such a big part of running any business. While all these costs may not be prohibitive, you’ll still need to have a comprehensive grasp of them before committing to your franchise business.
Talk to MDL for advice on finding the right franchise business for your needs
If you’d like to get a full understanding of the costs involved in setting up a franchise business, a conversation with McCarthy Durie Lawyers can help. We’ll take the time to understand your situation, and offer you straightforward advice about your options and the best way forward.
For more information or advice about buying a franchise, contact the Business Law team at McCarthy Durie Lawyers on 07 3370 5100 or use the contact form here.