Franchise fee consists of various benefits which franchisees must pay to franchisor. A franchise is a contact that guarantees a group members rights to using brand name, company logo, franchisor's business methods and knowledge in exchange for a fee. Franchise agreements usually contains two forms of charges which franchisee is obligated to pay franchisor: the initial franchise fee and the recurring royalty payments (M. Salar and O. Salar 2013, s.516).
Initial franchise fee
Initial fee or entry franchise fee -one-off payment, transferred to the franchisor at the moment of signing the franchise agreement. In other words, it is a one-time charge which franchisees have to pay franchisors when they become a member of franchising system. The high of initial cost of entry to franchise system usually depends on specific industry. Determination of the entry franchise fee amount can be based on various calculations. Nevertheless, there are some determinants which affects the high of this payment. One of the main factor affecting to this charge is the value of know-how, patents, trademark and the brand recognition by potencial clients. The considerable impact for a franchise fee have also the extent and type of support provided by franchisor and the cost of this support. More to the point, the high of initial franchise fees offering by competitors in the same industry have significant influence during calculation of this payment. Generally, the amount of initial franchise fee should bear the expenses incurred by franchisor during preparation of a new franchising package which usually include training programs, marketing plans, operating methods and assistance with employee recruitment. In fact, however initial franchise fee barely cover all mentioned costs. This is caused by the fact that initial expenses of developing a new franchise business are too high and potencial franchisee could not be able to pay it. If franchisor take into account all incurred initial costs, his offer would be unattractive against the back ground of competitive offerts (P.Krzyżaniak, 2016 s.44).
Royalties are a kind of periodically payment (usually monthly) which franchisee have to pay franchisor. Generally royalty payments shall represent a given percentage of sales profits. The amount of this fee typically varies from 3 to 10 percent of gross sales (M. Salar and O. Salar 2013).The royalty payments are compensation for ongoing support provided by franchisor such as technicall support, managerial support, administration, research and development. Usually, this recurring payments are the principal source of income for franchisor. Practically all services provided by franchisor to his franchisee are financed from this fees. As the result, royalty payments should be high enough to cover all those costs and ensure satisfactionary income for franchisor (P.Krzyżaniak, 2016 s.44).
The initial franchise fee and royalty payments are compensate not only for brand recognition and franchisor's operating methods. Franchisee have also an opportunity to buy needed goods at more favourable prices throughout the franchisor's mass market.Those charges guarantees also others benefits, such as ongoing franchisor's support, advertising and training, marketing plans, managerial and technical support (J. Velentzas and G. Broni 2013).
Advertising and marketing fees
However, in some cases franchisors requires some additional charges except for initial and ongoing payments. Sometimes franchisors treat marketing and advertising fees as a separate charges. Mentioned fees are usually used to fund increasing the brand recognition by advertising and marketings initiatives. Those fees are generally calculated as a percentage of frenchisee gross sales on a monthly basis. The high of this amount commonly depends on scale of marketing acivities and necessary expenditure incurred in order to conduct promtional initiatives (P.Krzyżaniak, 2016 s.44). It is not a rule that marketing and advertising fees are always considered as separate charges. Everything depends on conditions in agreement. Sometimes franchisors includes all advertising and marketing cost in royalty payments. Entering to a franchising system can be a great way to set-up a business but all mentioned below adventages have a price and commonly it is not a low price.
- Kaufmann, P. J. & Dant R. P. (2001) The pricing of franchise rights"Journal of retailing - Volume 77, Issue 4, Pages 537-545"
- Krzyżaniak P. (2016) Implementing Franchising into a business. Based on my own business plan, Centria University of applied sciences
- Salar M. and Salar O. (2013). Determining pros and cons of franchising by using swot analysis "Procedia - Social and Behavioral Sciences, Volume 122, 19 March 2014, Pages 515-519; 2nd World Conference on Design, Arts and Education DAE"
- Scott F. A. (1995). Franchising vs. company ownership as a decision variable of the firm " Review of industrial organization", Springer US
- Velentzas J. & Broni G. (2013) The Business Franchise Contract As A Distribution Marketing System: Free Competition And Consumer’s Protection "Procedia Economics and Finance 5, 763 – 770;International Conference On Applied Economics (ICOAE)"
Author: Aneta Walczyk