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As a franchisor, you need to ensure that your franchise locations are successful and receive an income. To ensure that the amount spent on the franchise does not outweigh your income, you will likely have a franchise fee system in place. A franchise fee is an ongoing payment, typically made by the franchisees. This will be in conjunction with an initial franchise fee paid by new franchisees to enter into the franchise business. There is no one right way of calculating and paying franchise fees. This article will outline five of the common methods of calculating franchise fees in New Zealand. 

1. Fixed Fee

A fixed or flat fee is a set amount of money that a franchisee must pay to you on a weekly or monthly basis. This amount is irrespective of the turnover or profit of the franchise. This amount, how to change it and whether it is possible, should be outlined as a clause in the franchise agreement.

This method of calculating franchise fees gives certainty to your income and provides the franchisee with the ability to plan for their financial commitments. 

2. Percentage of Weekly or Monthly Turnover

An alternative method to calculating franchise fees is to set a percentage of the income, or gross revenue, of the franchise. The franchisee can pay this amount on a weekly or monthly basis. For example, 5% of the franchisee’s gross revenue each month. The franchise agreement should specify this percentage. This method of franchise fees is also known as paying royalty fees. 

This method is more beneficial to the franchisee than a fixed fee, as it will correlate to the franchise’s earnings. If the business has been slow for a particular month, the franchisee will pay less in fees. Likewise, if the franchise is particularly successful one month, the franchisee will pay more. 

3. Mark-Ups

Another common method for franchise fees does not involve charging a direct payment to the franchisee. Instead, you could mark-up or margin on:

  • products provided; or
  • services provided. 

Products Provided

If you are manufacturing, importing or wholesaling a product, charging the franchisee with a mark-up on the price of that product may be your preferred method of calculating franchise fees. 

However, it is crucial to ensure that this mark-up does not make buying a franchise appear unattractive to potential franchisees. You should be cautious and ensure that the product is not more expensive than products of the same quality available from other providers. 

Services Provided

If you provide certain services to the franchisee, such as an accounting service, you may charge a mark-up on the price of such services. 

However, as with mark-ups on products provided, this amount should not dissuade individuals from entering into your franchise. There needs to be some unique advantage that accompanies using your services, over others for the same fee. 

4. Commission Paid by Suppliers

This option is a method of calculating franchise fees that does not involve any payment from your franchisees. Instead, you could charge a commission from the suppliers that provide the franchisee with products. 

This commission will be paid directly from the suppliers, or the suppliers will pay you a portion of the amount paid by the franchisee for the supplied products. The suppliers of your franchise will want to reward good clients. Furthermore, this method of calculating franchise fees encourages profitable and successful clients to buy even more products. 

If you decide to calculate your franchise fees from a commission paid by your franchise suppliers, you must detail this in the franchise agreement and the franchise as a whole. 

Things to Keep in Mind When Setting Up Franchise Fees

When you determine your chosen method or methods of calculating fees, it is essential to remember your franchise’s purpose. 

A franchise is, after all, a business. A business needs to be profitable in order to be viable. Therefore, as a franchisor, you should ensure that you receive an income that outweighs the amount you have to spend on the franchise. It may be appealing to keep the fees low to make purchasing a franchise as appealing as possible to potential franchisees. However, being unrealistic about the cost of running your franchise could lead to difficulties down the line. You may not be able to sustain the franchise or could be required to mark up the cost of fees after a franchisee has already entered into a franchise agreement. 

It would be best if you kept in mind:

  • the economic realities of running your franchise;
  • what market you intend on entering into; and 
  • the rate that you establish franchise units in a certain period, such as a year. 

In conjunction with this, you must be transparent with franchisees of what method or methods you decide to use to calculate the franchise fees. You can achieve transparency by clearly declaring your revenue streams and franchise fees calculation in both your franchise agreement and disclosure document

Key Takeaways

There is a range of ways to calculate your franchise fees. The most common methods are:

  • a fixed fee;
  • a percentage of the gross income of the franchise;
  • charging mark-ups on the products you provide;
  • charging mark-ups on the services you provide; and 
  • a commission paid by the suppliers of the franchise. 

It is important to keep in mind your franchise’s profitability and ensure complete transparency with your franchise when making this decision. 

If you have any questions about franchise fees, LegalVision’s franchise lawyers can help. Call us on 0800 005 570 or complete the form on this page. 

Frequently Asked Questions

How are franchise fees calculated?

Franchise fees are calculated by a range of methods in New Zealand. The most common methods are: a fixed fee; a percentage of the gross income of the franchise; charging mark-ups on the products you provide; charging mark-ups on the services you provide; and a commission paid by the suppliers of the franchise.

Are franchise fees negotiable?

The calculation of franchise fees will be detailed as a clause in the franchise agreement. Therefore, before the agreement is signed, the fees may be negotiable. However, once signed, the franchise fees are fixed.

How are royalty fees calculated?

Royalty fees are calculated by taking a specific percentage, say 5%, of each franchise location’s weekly or monthly profit.

How much does it cost to own a franchise restaurant?

The cost of owning and running a franchise restaurant will vary between each franchise, and franchise agreement.

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