Buying a franchise outlet is an exciting business opportunity. However, franchising is also an expensive venture. It involves a range of franchise fees that you must pay at the beginning and throughout the franchising process. This article will outline the range of franchise fees you will need to pay as a franchisee in New Zealand. 

Pay the Initial Franchise Fee

When you enter into a franchise and become a franchisee, you will be required to pay an upfront, one-off fee to the franchisor. The amount of money will vary from franchise to franchise, to reflect that particular business. It may be as low as $5,000 or more than $1,000,000. 

This initial fee can be seen as you buying yourself into the business. It reimburses the franchisor for helping you establish your new business location and helps repay some of the costs that they paid when they first developed that franchise. The upfront fee also pays for and gives you the right to:

  • the franchisor’s name;
  • training for both you and your staff;
  • the franchisor’s trademark;
  • the operating systems; and
  • services to aid you in starting your new outlet.

Set-up Costs

When you first set up your franchise location, there will be several set-up costs that you will have to pay in conjunction with the initial franchise fee. These costs will vary, depending on what your franchisor provides you and what you are expected to pay yourself. 

You may have to pay:

  • a rental bond to acquire the lease for the franchise location;
  • the cost of fitting out the space;
  • the cost of any external advertising or signage for that location; 
  • for a company car; or
  • for initial stock or equipment for your outlet.

Ongoing Franchise Fees

Owning and operating a franchise location also means paying ongoing franchise fees. These fees are in addition to the initial franchise fee you pay to enter into the franchise. These fees act as the franchisor’s income and compensate for the ongoing support and services that the franchisor provides each of their franchisees. 

Franchise fees are paid to the franchisor regularly throughout the length of your franchise agreement, usually weekly or monthly. How these fees are calculated will vary.  The most common methods in New Zealand are:

  • a fixed fee, specified in your franchise agreement;
  • a percentage of the gross income of the franchise; 
  • charging mark-ups on the products or services provided by the franchisor; or
  • a commission paid by the suppliers of the franchise. 

The franchise agreement will contain a clause that outlines which method or methods of calculation your franchisor uses. This method and amount will almost always be non-negotiable, as it is calculated to support the franchisor and their supply of services and support. However, this amount should be justifiable and reasonably connected to the cost of those services.  

Marketing Fees

You may also need to pay a marketing fee, on top of these ongoing franchise fees. 

Many franchise systems charge franchisees a marketing fee to cover the cost of the franchise’s wider, national marketing. These marketing contributions will usually be paid to a marketing fund. This fund, however, cannot be used by the franchisor as a revenue stream. 

Marketing fees may be collected through:

  • a percentage of the gross income of the franchise;
  • a fixed flat fee; or 
  • the franchise’s margins. 

The franchise agreement should clearly state:

  • whether your franchisor charges a marketing fee; and 
  • the method of calculating and collecting fees. 

Ongoing Costs

As the owner of a franchise location, you are running a business. Running your own business means that you will have to pay for services that may not be covered by your initial or ongoing franchise fees. These ongoing costs may include: 

  • the price of rent;
  • rates and power bills;
  • staff wages; 
  • equipment maintenance and repairs; 
  • stock; and
  • local advertising.

Although these costs will vary from franchise to franchise, your franchisor should be able to give you some help in budgeting how much these will be.

Key Takeaways

Franchising can be a profitable business venture. However, it is important to remember that franchising’s long-term benefits come at quite an expense. As a franchisee, you will need to pay a range of upfront and ongoing costs, such as:

  • the initial franchise fee; 
  • the cost of setting up your franchise location; 
  • ongoing franchise fees to your franchisor; 
  • contributions to the franchise’s marketing fund; and 
  • the ongoing costs of running a business.

If you wish to buy a franchise, you should be aware of the short and long-term costs that accompany such a business venture and have the resources to do so. 

If you are interested in buying a franchise, contact LegalVision’s franchising lawyers on 0800 005 570 or complete the form on this page.

FAQs

What are franchise fees?

Franchise fees are the payments you have to make as a franchisee or an owner of a franchise unit. These fees include upfront payments and ongoing fees.

How are franchise fees calculated?

The most common methods for calculating franchise fees are: a fixed fee specified in your franchise agreement; a percentage of the gross income of the franchise; charging mark-ups on the products or services provided for by the franchisor; or a commission paid by the suppliers of the franchise.

What is the initial franchise fee?

An initial franchise fee is the upfront payment you make to the franchisor to ‘buy into’ the franchise. This fee usually provides you with the rights to use the franchise’s intellectual property, such as the name and logo, and the franchise’s operating and training systems.

Are franchise fees negotiable?

Franchise fees are usually non-negotiable. This is because the fee is calculated to account for the costs the franchisor incurs for running the franchise.

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