Franchise Fee Definition

As with all types of business, franchising has its own unique terminology and jargon to get to grips with. Nowhere is this more obvious than when talking about the franchise fee and the franchise agreement. Here, we take a look at some of the most common terms you’re likely to encounter.

Franchise fee

The initial fee paid by the franchisee to the franchisor. It benefits the franchisor by covering all of the costs accrued when starting a new franchise unit. It benefits the franchisee by providing access to the business model, the rights to operate under the brand name, and the franchise’s training and support systems. The franchise fee is usually calculated as a percentage of sales, though it is sometimes calculated as a flat fee. The size of the franchise fee is usually proportional to the size of the franchise and the extent to which their brand is recognised.

Advertising fee

The payment made by a franchisee to the franchisor to cover marketing and advertising costs for the brand. While some franchises will charge a marketing fee, others won’t. This could be because they don’t advertise on behalf of franchisees or because the marketing budget is drawn from the royalty fee. Generally, the marketing fee is calculated as a percentage of sales. However, it can also occasionally be calculated as a flat fee.

British Franchise Association (BFA)

The organisation that promotes ethical franchising practices in the UK. Founded in 1977, it is now the largest franchising association in the country and advises its members on matters regarding the franchise system. It also operates an accreditation system by which franchises can be certified as operating within its ethical guidelines. Before you agree to pay any franchise fee, it’s a good idea to consult the BFA.

Franchise agreement

The document that defines the relationship between franchisor and franchisee. It details the rights and responsibilities each party has to one another and establishes the cost of the franchise, as well as what services the franchisor will provide the franchisee. It is considered the most important document in the entire franchising system. All franchise agreements should be looked over by a trained and qualified legal advisor before they are signed.

Read more on our franchise agreement definition.

Franchise brand

The set of values, alongside a certain aesthetic image, that a business adopts in order to portray themselves in a certain way to customers. Different organisations will associate themselves with different ideas to appeal to different customers. For instance, a designer goods manufacturer is likely to associate themselves with concepts like luxury, wealth, and prestige. On the other hand, another clothing brand may wish to associate themselves with thriftiness, environmentalism, and socially conscious policies. The way these ideas and images come together is the brand.

Franchise package

Everything the franchisee receives from the franchisor in return for paying the franchise fee. Generally, it includes the right to use the franchise’s name, brand image, and trademarks, as well as access to the franchise training programme, support systems, and digital technology. It may also include equipment, stock, vehicles, shop fitting, and a number of other industry-specific features.

Read more about our business plan definition.

Insurance

Most individuals making a franchise investment secure that investment by taking out insurance. Generally, the insurance covers two different things. First, there is personal franchise insurance for the franchisee. This covers the franchisee in case of accident or sickness. Second, there is insurance protection for the business. Most commonly, this covers assets from things like fire, theft, damage, liability claims, accidents, and on-site cash reserves. The type of insurance, alongside details of what must be insured, should be detailed in the franchise agreement.

Legal advisor

A trained professional with experience of the franchise sector. Every franchisee should have access to a trusted legal advisor who understands the specifics of franchise law. The legal advisor is absolutely essential when it comes to ensuring the franchise agreement is legally sound and works for the franchisee, as well as the franchisor.

Renewal

Having reached the end of the term set out in the initial franchise agreement, the franchisee may be offered a renewal. This is the opportunity to sign a new agreement and extend franchise ownership for an agreed-upon period. The franchisee can choose whether or not to accept the offer of a renewal, just as the franchisor can choose whether to extend the offer. If the renewal is accepted, the franchisee will be expected to pay another franchise fee. However, this is likely to be lower than the initial franchise fee you paid with your first contract.

Resale

The process by which a franchisee decides to sell their franchise unit as a fully functional business. The franchise will pass to the new owner, who will continue to run it as it is. The criteria resales must meet are usually set out in the franchise agreement. Usually, they will include a clause that allows the franchisor to veto any buyer that they’re not content to work with.

Royalty fee

An on-going fee paid by the franchisee to the franchisor in return for their management services. It is usually calculated as a percentage of sales but can occasionally be calculated as a flat fee. This is how franchisors profit from the franchise system.

Set-up costs

The total franchise cost of setting up a new unit. It includes the franchise fee, equipment, business premises, stock, staff, working capital, among other things.

Technology licence

The fee paid by a franchisee to a franchisor in order to gain access to certain digital systems or technologies. This isn't a common fee, as many franchisors include it in the general franchise fee, but some low-cost franchises use it to increase their profits.

As you can see, there's a large number of unique terms to understand when discussing the franchise fee. Most experienced franchisors will be fluent in this language but newcomers may struggle with some of the jargon. Fortunately, many of these terms are applicable to other aspects of franchising, too. This means that understanding what they mean will help you in a variety of different ways going forwards.