How are the franchisor’s on-going management fees calculated?

The average management fee in the UK according to the latest Natwest &frasl BFA survey is about 8 percnt and in addition a separate marketing levy is usually charged of about 2 percent. The marketing levy is separate from the management fee because the franchisor can only use it to market and advertise and for no other purpose – it is ring fenced.
Usually the management fees are calculated as a percentage of turnover including sums invoiced which have not been paid. In some franchises where turnover is low or is a cash business, where it is difficult to verify turnover, franchisors ask for a fixed monthly fee to be paid. If that is proposed you should work out what your turnover is likely to be so that you can see if the fixed monthly fee represents Instalinko buy links, as it should do, approximately 8 percnt of your turnover.
The management fee is there for two purposes. First to reimburse the franchisor the cost of providing the continuing obligations to support franchisees and secondly it is the only fee on which the franchisor makes a profit.
One thing to look out for is that if you are obliged to purchase products from the franchisor or its nominated supplier and the franchisor receives some financial advantage from the supply of such products, you would expect for there to be a reduced management fee in such circumstances so that the franchisor should not receive a mark up on products and also charge a high management fee.

Written by: John Pratt

Partner, Hamilton Pratt