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4 Ongoing Costs Associated With Being a Franchisee

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If you are thinking about purchasing a franchise, you need to consider what fees you will have to pay to keep the business in operation. Although many of the upfront costs associated with purchasing a franchise are anticipated, you also need to consider any ongoing costs you must pay. This article will take you through four ongoing costs associated with being a franchisee in New Zealand.

1. Royalty Payments 

Royalty payments are the ongoing payments required for the continued use of the business’s intellectual property, systems and training. These fees are separate from the initial franchise fee.

The franchise agreement will determine how royalties are to be paid and how often. This amount is usually based on a percentage of your revenue or, in some cases, may be a fixed fee.

Most franchisors reinvest a portion of the royalty payments they receive into the brand’s ongoing development, such as new goods or services, investment in technology or improving systems and processes.

Maintaining the franchise’s brand is an important component of the franchise business model. Buying into an established brand with loyal customers is the main reason most people invest in a franchise. Royalty payments make this possible, making it an important payment that will ultimately benefit your business. 

2. Marketing Fund and Advertising Costs

Another ongoing payment franchisees make to the franchisor is a contribution to a marketing fund. This payment goes into a pool for the advertising campaigns of the entire franchise network.

Marketing funds may be raised in several ways, some of which include the following:

  • flat weekly or monthly fee;
  • percentage of turnover (as part of the royalty fee);
  • percentage of turnover collected (separately from the royalty fee); 
  • mark-ups on product supplied; or
  • a rebate from suppliers

It is usually the case that the franchisees do not get a say on how marketing money is spent. Instead, the franchisor makes the choice of how to distribute these funds. Nonetheless, these funds are typically for marketing expenses and the general costs of administering the fund.

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3. Lease Costs

Another cost associated with being a franchisee is lease payments, if you are a premises-based franchisee. This will differ depending on the structure of your lease arrangements.

There are two main ways to structure leasing arrangements in a franchise agreement:

  1. the franchisee leases a property directly through a landlord; or
  2. the franchisor holds the lease and grants you a licence to use a property.

If you choose to enter into a lease with a landlord, you need to know that you have separate obligations to your landlord and the franchise. For example, you will be solely responsible for negotiating the lease terms and satisfying your requirements under the lease, including paying rent.

You should check that the franchise agreement and the lease agreement commence and end simultaneously. You do not want to find yourself needing to vacate the premises before the end of the franchise agreement. This will likely constitute a breach of the franchise agreement and result in further costs.

Alternatively, if a franchisor has an existing lease of premises, they may grant you a licence to use the property. This agreement would see you paying all costs associated with the lease (including rent and outgoings) as a licence fee for occupying the premises.

In this instance, while you do not pay the initial lease negotiation costs, you are still primarily responsible for payments under the lease. In addition, the franchisor may require that you provide a personal guarantee to protect themselves against damage or non-payment of rent. 

4.  Operational Costs

Finally, you should consider the day-to-day costs involved in operating your franchise. Operational costs play an important role in understanding what it will take to break even.  These operational costs may include:

  • employee salaries and other employee-related expenses, such as uniforms;
  • utilities; 
  • inventory, including any materials needed to prepare your products or services;
  • miscellaneous supplies, such as office or cleaning materials;
  • insurance, including property and contents insurance, worker’s compensation or car insurance. 
  • building and equipment maintenance;
  • computer costs, such as computer hardware, point of sales software, or any accounting software you use; and
  • FANZ membership

Other expenses may include paying professional fees for a lawyer or an accountant.

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Key Takeaways

If you are considering buying a franchise in New Zealand, it is important to consider what costs you will pay as a franchisee. In addition to upfront costs, some of the ongoing costs to consider include:

  • royalty fees;
  • marketing and advertising costs;
  • lease costs; and
  • operational costs.

If you need assistance understanding the costs to bear as a franchisee, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page

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