The world of franchising offers prospective franchisees the opportunity to benefit from an established business with a ready-made business model and a solid brand that’s well-known across the industry. However, franchisors need to calculate their franchise fees for their franchisees before signing a franchise agreement with them. To understand what these fees are and how they are typically calculated, keep reading below.
What is a franchise fee?
The franchise fee in a franchise system is the “membership” fee of belonging to a franchise. This fee gives the franchisee the right to use and operate under the parent brand’s name, while also having the rights to use the brand’s intellectual property and proprietary information for the duration of the franchise agreement.
What factors are considered in calculating the franchise fee?
In franchise accounting, the franchise fee is considered as an entry into the franchisor’s books. But how is the franchise fee calculated and what factors go into determining this fee? Although the answer will depend and differ depending on every franchise out there, there are some common characteristics that go into calculating the franchise fee. Among these include the following:
- The value of the franchise’s trademarks and branding
- The geographically protected area that will prevent and protect a franchisee from internal competition or “cannibalism”
- The costs associated with recruiting and selecting franchisees (including marketing and advertising)
- The costs of providing the initial and ongoing training and support to franchisees
- The costs associated with franchise development
- Costs related to the potential profitability of the franchisee and the ROI on the proposed franchise, and
- The amount of gross profit the franchisor will net from the fee (for example, 25% of the total fee amount or even higher).
Other fees to consider
There are other fees for franchisees to consider when embarking on a franchising journey. These may include but are not limited to the following:
- Working capital – the amount of money a franchisee will need for the business’ operations over the first three to six months to ensure it continues without problems or challenges in cash flow
- Royalty payments – these are expressed either as a percentage or as a fixed amount and will differ from franchisor to franchisor
- Fees for the marketing and advertising fund – these are usually expressed as a percentage of the total revenue a franchisee earns. An example of this is 3% of gross revenue and should also cover marketing materials and software.
- The costs associated with site selection and build out.
- The costs associated with hiring personnel.
- Sales costs.
As such, accounting for franchise fees is a necessary aspect of a franchisor working out the franchise fees which their prospective franchisees will need to pay. However, there are other fees that are associated with but not directly related to the franchise fee that a franchisee will need to be prepared with to ensure that their business venture is a success.
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Through our outsourced bookkeeping services in London, you can now better and more easily calculate your franchise fees as well as the working capital and other associated costs to determine what a prospective franchisee’s initial investment requirements will be. With a professional team at your disposal, calculating your franchise fees is now a hassle-free process. Get in touch with us for any bookkeeping or accounting help that you may need. Our team is ready and more than happy to help you.