Franchise fees are what a franchisee pays the franchisor for the brand, the system and the support that come with a franchise. Most UK franchises charge three main fees: an initial franchise fee, an ongoing management service fee or royalty, and a contribution to a marketing fund. This guide explains each one, what they usually cover, the typical ranges published for the UK, the other franchise costs that are easy to miss and how franchisors set their fees.
The main franchise fees at a glance
| Fee | When it is paid | How it is usually charged | Typical UK range published |
|---|---|---|---|
| Initial franchise fee | Once, on signing | A fixed sum, sometimes in instalments | Often around £40,000, from £10,000 to over £100,000 |
| Management service fee or royalty | Weekly or monthly | A percentage of turnover, or a fixed fee | For example 6% to 12% of turnover |
| Marketing fund contribution | Weekly or monthly | A percentage of revenue or a set monthly amount | Often 1% to 2% of revenue |
| Renewal fee | At the end of the term | A fixed sum | Usually less than the initial fee |
The initial franchise fee
The initial fee is a one-off payment made when the franchise agreement is signed. HMRC’s manual describes it as payable in one sum or in instalments. Sprintlaw says it usually covers initial training, set-up support and the right to use the brand and systems, that it often averages around £40,000 in the UK but can range from £10,000 to well over £100,000, and that it is usually non-refundable even if the franchisee later leaves. Some franchisors include equipment or an opening stock order in the fee, so check exactly what it buys.
The initial fee is not the whole start-up cost. Business Gateway notes that a franchisee also pays to set up the business itself, including materials, premises and stock, and that the total cost of buying a franchise ranges from a few thousand pounds to six and seven figure sums.
Ongoing royalties and the management service fee
Once the business is trading, the franchisee pays a continuing fee. In the UK it is often called a management service fee, and elsewhere a royalty. HMRC describes continuing fees calculated as a percentage of turnover, a mark-up on goods bought from the franchisor or a regular fixed payment per outlet, and says they are intended to pay for services the franchisee may need in later years. Sprintlaw gives 6% to 12% of turnover as an example range for a percentage fee.
The basis matters as much as the rate. A percentage of turnover is paid whether or not the unit makes a profit, and Sprintlaw notes that some agreements also set a minimum monthly fee even when sales are low. A fixed fee is predictable but does not fall in a quiet month. A mark-up on supplies is less visible, so ask how the franchisor’s prices compare with buying the same goods elsewhere.
The franchise marketing fund
Most large UK franchises ask franchisees to contribute to a central or regional marketing fund, which pays for brand advertising across the network. Sprintlaw puts the usual contribution at 1% to 2% of revenue, or a set monthly amount, and says the agreement should state how often you pay, how much is collected and what it is spent on. It is reasonable to ask a franchisor which recent campaigns the fund paid for and how it supports a unit in your area. Local marketing for your own territory is usually on top of the fund contribution.
A worked example
The figures below are an illustration only, using round numbers inside the published ranges, to show how the fees add up for one year. They are not data from any real franchise.
Other franchise costs to budget for
The headline fees are only part of the cost of running a franchise. Sprintlaw lists extra costs to look out for, including:
- fit-out and signage
- equipment or software you are required to buy
- minimum stock orders from approved suppliers
- uniforms and training for new staff
- insurance, business rates and utilities
- technology fees for the franchisor’s systems
- legal or audit costs the franchisor requires
Renewal and transfer can also carry fees. Sprintlaw notes that renewing at the end of the term, often five or ten years, may come with a renewal fee that is usually less than the initial fee. If you plan to sell the franchise one day, check whether the agreement charges a transfer fee and what the franchisor’s approval process involves. Our guide to franchise agreements explains where these terms sit.
How franchisors set their fees
For a franchisor, fees have to do two jobs: pay for the support the network needs and leave the franchisee a living. HMRC’s description of continuing fees as payment for services needed in later years is a useful test. If the management service fee would not cover proper training, field support and system updates, it is too low; if a typical franchisee cannot pay it and still make a fair profit, it is too high. Our guide on how to franchise your business covers the financial model in more detail.
Getting advice on franchise fees
Ask whether every fee is quoted with or without VAT, and have an accountant build a cash flow with the fees included before you commit. Our directory lists franchise accountants and bookkeepers who work with franchisees and franchisors, franchise finance brokers for funding the initial fee and set-up, and franchise agreement solicitors to check how the fees are written into the contract.
