In franchising, there are both continuing fees and an initial fee – the latter is the fee that you will pay to the franchisor on entering into the franchise agreement. You need to look very carefully at that fee because in some franchises the franchisor charges an initial fee, sometimes called a “licence fee” and then a separate package fee which is a fee payable for physical elements that are provided by the franchisor. In other franchises the franchisor requires an incoming franchisee to acquire physical elements from third parties. When comparing franchises and the cost of entering into a franchise, you must make sure that you are comparing apples with apples and know precisely what it is that you will receive for the initial fee. In fact, that is information that you will need for your tax return because some elements of the initial fee have different tax treatment to others and so you need the franchisor to break down the initial fees and attribute a cost to each element.
Although what you will receive for the payment of the initial fees does vary from franchise to franchise, it is important that the initial fee does not contain a substantial element of profit for the franchisor because, otherwise, the danger is that the franchisor’s business model is the sale of franchises rather than ensuring that franchisees operate successful businesses. Franchisors are, however, allowed to recover their recruitment costs and a contribution to their costs in developing the franchise.
Generally, you would expect an initial fee and other fees payable on entering into the franchise agreement to include payment for the provision of the manual which contains the franchisor’s confidential information, initial training, the launch and promotion of the franchise, an initial stock of stationery, stock of products, equipment, hardware and software.