Financial aspects of franchising
Initial franchise investment
The initial investment consists of an upfront fee, the investment amount required to set up the business and working capital. The actual amounts vary depending on the type and size of the business.
- Upfront fee - The upfront fee (or joining fee) is payable by the franchisee to the franchisor, usually at the time when the franchise agreement is signed. It pays for admission to the network, the right to trade under its brand and to receive initial assistance and training.
- Franchise investment amount - The franchisee pays for shopfittings, equipment, vehicles and anything else that is needed to operate the business.
- Working capital - Because no business is profitable from the day it opens its doors for the first time, franchisees must provide working capital. This is the money needed to pay ongoing expenses until the business's cash flow kicks in.
Ongoing payments
Management services fee
This fee is usually calculated as a percentage of the franchisee's sales and is payable monthly. The actual percentage varies but will usually range from 3% to 9%. This fee pays for ongoing support services and allows the franchisor to make a profit.
Contribution to the marketing fund
Most networks operate a marketing fund. Franchisees' contribution ranges from 1% to 5%, with the franchisor's own stores contributing the same. The monies are used to fund regional or national product advertising campaigns, for example on TV.
More about fees
Some franchisors charge a fixed amount as franchise fee, instead of ongoing management fees but this is generally not recommended as if a franchisor is getting a fixed fee there is less incentive to support. Another point up for debate is the charging of additional fees, for example if the franchisor carries out administrative duties on franchisees' behalf. This should only be done if franchisees benefit by sharing overhead costs, for example for accounting services .
