Q&A

Q: What does the initial franchise fee usually cover? And what other fees may I have to pay?

CLIVE SAWYER
Managing Director, Business Options
A: The initial franchisee fee normally covers both the granting of the right to be a franchisee and the initial franchisee training; however some franchisors charge for the training separately. The initial franchisee fee is normally just one of the upfront fees a prospective franchisee will need to pay. The other two main upfront fees are 1) The set-up/ equipment fee, which is either payable to the franchisor or the franchisee purchases themselves; 2) working capital, which is required by the franchisee to operate their franchise but not payable to the franchisor. The key when buying any franchise is to find out what the total investment will be. Also don't forget any VAT due on these fees. If you will be VAT registered as the franchisee, most, if not all of the VAT will be reclaimable, however if you won't be VAT registered then this is an additional cost that you will need to allow for. Once you have bought your franchise you will normally be required to pay either a range of monthly fees to the franchisor for the services they provide and/or a mark up on products that you must purchase from the franchisor. It is right that you should pay the franchisor for the ongoing support and services that the franchisor will provide, however make sure you are clear on what you will get for these ongoing fees and also what happens if you cease being a franchisee mid-term, as some franchisors charge a penalty fee.

PETER WILLIAMS
Franchise consultant
A: The initial fee covers the granting of the franchise, as per the detail set out in the prospectus and franchise agreement, and may extend to the inclusion of training and other establishment-related items. So that you are absolutely clear on this point, ask the franchisor for a line-by-line breakdown of start-up costs listing everything you require in order to commence trading, ie, equipment, stock, vehicle(s), marketing material, stationery, etc. The initial fee is usually payable at the outset and is often non-recurring. The franchisor will not only provide training, but follow on with a package of ongoing support, and accordingly charge a continuing fee, usually referred to as the management service fee (MSF). In certain cases this might relate to a fixed amount, but preferably it will be expressed as a percentage of franchisee turnover - such an arrangement being seen to be fairest to both parties. The MSF is usually payable monthly. Additionally, there will sometimes be a marketing fund to which all franchisees contribute, for the benefit of all concerned. Again, a percentage arrangement is preferable, with payments due on a monthly basis.