The general rule is that franchisees pay franchisors a continuing fee of, usually, 10% of sums received and sums receivable by a franchisee. Of that 10% normally 2% is allocated to a marketing levy which creates a marketing fund to build up the brand’s reputation. The remaining 8% is retained by the franchisor and includes the franchisor’s profit and reimburses the franchisor the costs of continuing to advise and assist franchisees.
Basing continuing fees on a percentage of “turnover” does, of course, require franchise owners to be honest in their declarations of “turnover” and you would expect franchise agreements to contain provisions which allow franchisees to check on this by, for instance, requiring reports and VAT returns to be provided as well as giving franchisors the right to audit.
For some business – usually those based on cash transactions where it is very difficult to establish the turnover of a franchisee, franchisors opt for a fixed fee. This option is also used for low cost franchises where franchisees are working from home, perhaps on a part time basis so that franchisors are guaranteed a certain income whether or not a particular franchisee devotes a great deal of time to the franchise.
As to whether one option is more favourable than the other that really depends on the amount of the fixed fee being charged – clearly a prospective franchisee needs to establish what its likely turnover will be so that that franchisee can also establish the percentage that the fixed fee is likely to represent of the franchisee’s turnover. If it is more than 10% of likely turnover then the payment of a fixed fee is likely to be unattractive.
Written by: John Pratt
Partner, Hamilton Pratt