Why does a franchisor charge a management service fee?

Not all do!  There are a small number of franchisors that don’t charge this fee because they require their franchisees to purchase products from them and they make their profit from their product supplies. This highlights that all prospective franchisees must make sure that if there is an obligation to buy products from the franchisor that the franchisor does not make large profits from the supply of products and also charge a high management service fee.  If franchisors make a profit on product supplies then that should be reflected in a reduced management service fee.

The purpose of the management service fee is essentially two fold.  First it is to reimburse the franchisor the cost of providing all of the on-going services that franchisors provide to their franchisees such as training, the provision of guidance, updating the manual and developing the system.  Secondly, the fee contains the franchisor’s profit element.  Generally speaking franchisors should not make a profit or a substantial profit from the initial fee and, therefore, either in conjunction with or instead of profit on the supply of products, the management service fee is the franchisor’s only source of profit.