If you’re thinking about purchasing a franchise business, odds are one of the first things you want to know is, what is a franchise fee, and what does it actually pay for? The answer isn’t always simple, and that’s why this piece is worth reading.
We will explain everything you need to know about franchise fees, from the initial franchise fee to additional ongoing fees, royalties, renewal fees and even the documentation fee that could slip into your franchise agreement. Knowing what fees and costs to expect will help you conduct better due diligence and avoid surprises that could stop you from building a successful franchise.
What Is a Franchise Fee and Why Is It Charged?
A franchise fee is the upfront payment that a franchisee makes to a franchisor in order to use the franchisor’s brand and proprietary information, such as their systems and support. This fee is a one-time charge and is usually paid when you sign a franchise agreement.
A franchise fee covers the cost of bringing you on board in the franchisor’s network. This includes operating manuals, start-up assistance, business systems, training and administrative support. Although not a flat-rate cost, it’s typically determined by the franchisor and appears on your disclosure documents.
In Australia, franchise fees can be as low as $5,000 and extend to $100,000+ depending on the brand, industry and scale of the business. It is important to note that this investment in capital is not always tax deductible as an expense and is instead considered a capital investment for tax purposes. You may also be entitled to a GST credit if the fee has been charged in a way that gives rise to it being subject to GST.
What Does the Initial Franchise Fee Cover?
The franchisor’s cost to get you going as a new franchise comes through the territory fee. That may include:
- Setup training for you and your staff
- Access to systems, software, and intellectual property
- Starter kits for branding and marketing
- Site selection and setup support
- Pre-opening assistance
This fee includes all of the necessary start-up services to launch your franchise business. Think of it as a down payment on an established brand with tested processes.
Weighing the cost against the high price tag, remember that you’re getting a brand, a trademark and ongoing mentorship that would take years (and a lot of money) to build from scratch.
Ongoing Fees: What You Pay After Startup
Franchisees pay various fees (the initial franchise fee is simply the first of these payments) during the period of the franchise agreement as consideration for the rights to the franchise. These may include:
- Royalty payments (typically, some percentage of the overall income)
- Marketing or advertising fund contributions
- Continued training, and support will be billed at their then current rates
The continuing royalty is typically charged on a weekly or monthly basis and is to provide for the ongoing access to the brand’s systems and updates, operational support, and research. Often your industry will rely on these ongoing franchise fees to be your lifeblood, especially in the early days when you are establishing your customer base.
Such fees can account for 4 to 12 percent of revenue, depending on the industry and the size of the franchise. Some brands may choose to offer a flat fee instead.
Marketing & Advertising Fund Contributions
Most franchisors charge a marketing fund or advertising fund contribution to fuel collective marketing efforts across the network. These fees and costs are pooled together and used to promote the franchise brand at a national or regional level.
The idea is simple: many franchisees contributing a small percentage of sales results in a bigger budget and wider reach than any one operator could afford alone. This drives brand recognition and leads to benefits for all parties.
It’s worth noting that while this upfront cost or ongoing percentage may feel like a burden, it’s an investment in business visibility and long-term growth.
Training Fees and What They Include
A training fee may be included as part of your initial franchise fee, or it may appear as a separate upfront line item. Either way, it’s vital to understand what the training involves.
Typically, this fee covers:
- In-person or online training sessions
- Operational procedures and systems
- Product or service delivery training
- Team leadership and HR basics
- Financial and business management
Whether you’re buying into a food, retail, or service-based franchise business, proper onboarding is key. A strong training programme helps maintain brand consistency and operational excellence across all locations.
Renewal Fees and Selling Your Franchise
When your initial term comes to an end, most franchisors charge a renewal fee if you want to extend the agreement. This fee is usually lower than the initial franchise fee, but it still reflects the ongoing value of brand access and operational support.
Renewal fees may also include administrative costs for updating paperwork or providing refresher training. If a franchisee wishes to sell their business, there may also be additional fees tied to transferring the licence, reviewing the buyer, or adjusting the franchise agreement.
It’s crucial to consider these costs involved as part of your franchisee’s total commitment. Working with expert lawyers and franchise consultants can help you interpret these clauses and avoid nasty surprises later.
Documentation Fees and Legal Considerations
Some franchisors include a documentation fee to cover legal costs arising from preparing your franchise agreement, disclosure documents, and other contracts.
This administrative charge might seem minor in comparison to the initial franchise fee, but don’t underestimate it. Depending on the business in Australia and the complexity of the agreement, documentation fees can add thousands to your upfront fees.
Be sure to seek legal advice from expert lawyers who understand the updated franchising code and can spot clauses that may arise in the future. It’s part of your due diligence to ensure you’re not overpaying or agreeing to one-sided terms.
How to Assess the Value of a Franchise Fee
Not all franchise fees are created equal. Before signing anything, ask yourself:
- What does this fee cover in practical terms?
- Is the franchisor offering real value, systems, and support?
- Are the ongoing fees proportionate to the support I’ll receive?
- Can I afford the capital investment and still maintain healthy cash flow?
Also consider whether the fee is paid once or at multiple stages (e.g. renewal fee, training fee, etc.). Ask for a detailed breakdown of fees and costs, and make sure you’re comparing apples to apples if you’re evaluating multiple franchise opportunities.
Your franchisee and franchisor relationship should feel balanced and transparent. If not, think twice.
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Final Thoughts: Franchise Fees Are an Investment, Not Just a Cost
When it comes down to it, the franchise fee provides you with access to a successful business model with the reputation of a brand that’s built a sustainable system and continued support. But don’t think of it just as a charged fee but as a capital investment in yourself moving forward.
Understanding what’s covered by the franchise fee, what other fees the franchisor charges, and how they’re structured will help you select the right franchise and avoid unpleasant surprises later.
Considering buying a franchise—or even starting one?
At The Franchise Consultants, we work with first-time buyers and the most experienced of entrepreneurs to ensure they understand the cost base, the pitfalls, and the success within the world of franchising. We’ll guide you through the numbers, give you insight and link you up with expert attorneys and advisors along the way.
Get in touch with us now to gain the confidence you need to do franchising right.
FAQS
In addition to the initial franchise payment, a franchisor may apply various service fees to cover costs related to administration, ongoing support, or software use. These are separate from the fee that the franchisee pays to operate under the brand and are often outlined clearly in the franchise agreement. These fees must be paid regularly—often monthly—and help pay the franchisor for their continued involvement in the business.
A royalty is a recurring fee that the franchisee pays—often calculated as a percentage of gross sales. Unlike upfront fees, royalties are ongoing and must be paid for the duration of the franchise relationship. They are distinct from fees and costs like training or marketing contributions, and they directly cover costs associated with brand support, innovation, and national operations. Royalties typically have GST included, depending on the franchisor’s billing structure.
Upfront fees refer to the initial capital investment needed to launch your franchise. This amount is broader than the franchise fee per se—it can include costs like equipment, signage, leasehold improvements, and more. While the fee that the franchisee pays is part of this package, the full upfront cost often bundles in service fees to cover costs related to setup and training. These payments must be paid before operations begin, and most are GST included.
Yes, most franchises operating as a business in Australia will require franchisees to contribute to a marketing fund. This fee helps cover costs of national campaigns, brand promotions, and collective advertising. The fee that the franchisee pays is usually a fixed fee or percentage of sales and is distinct from local store advertising expenses. These contributions must be paid regularly and may have GST included, depending on how the franchisor manages the fund.
Expert lawyers can help you understand what you’re committing to before you pay the franchisor any money. The franchise fee per se might seem straightforward, but hidden service fees, ongoing charges, and restrictive clauses could be buried in the contract. A legal professional can break down all fees and costs, ensure GST is included where required, and explain what must be paid over time. Their guidance can save you from costly surprises and ensure your interests are protected.