How is a franchisor’s management service fee calculated?

In a franchise relationship there are normally two continuing fees.  The first which is usually referred to as a management service fee and the second is a marketing fee.  Sometimes the marketing fee  is rolled into the management service fee, but generally that is not considered to be good practice.

According to recent NatWest/bfa surveys the average management service fee is 8% of a franchisee’s turnover and marketing fees are calculated at approximately 2% of a franchisee’s turnover.

The great majority of continuing fees are calculated as a percentage of turnover rather than a fixed amount although occasionally for franchises which have a substantial amount of cash receipts or operate from home or are part time the franchisor require payment of a fixed amount which is usually payable on a monthly basis.

The purpose of the management service fee is to reimburse the franchisor the costs that it will incur in providing continuing support to the franchisee and also to provide the franchisor with a profit.  Generally the franchisor should not make a profit from the initial fee and so the profit element of the management service fee is the only potential profit stream for a franchisor subject to any profit that the franchisor earns on the supply of products or services to franchisees.  The bfa has made it clear that if a franchisor does make a profit on these supplies then that must be disclosed in the franchise agreement and clearly this will have an impact on the level of the management service fee because it would be wrong for a franchisor to charge a substantial mark up on product or service supplies and also to charge a significant management service fee so franchisees should always enquire as to the level of mark ups retained by franchisors on product and service supplies.