Franchise Fees Explained: Starting Out and Ongoing Costs
Franchise fees are a core expense in any franchise business. Buying a franchise can be an attractive way into business, particularly when you benefit from an established brand, proven systems, training and ongoing support.
But the initial purchase price is only part of the financial commitment. Before investing, it’s important to understand the difference between the fees you pay when starting out and those you’ll keep paying every year for the life of your franchise.
1. Initial franchise costs: getting started
These are the typical costs you may face before opening your doors.
| Type of cost | What it covers |
|---|---|
| Initial franchise fee | The right to operate under the franchisor’s brand and business system |
| Business purchase price | The cost of acquiring an existing franchise, if applicable |
| Shop fit-out | Premises, signage, furniture and renovations |
| Equipment | Machinery, technology, POS systems and other operating equipment |
| Initial training | Training for owners and employees |
| Opening stock | Inventory needed to start trading |
| Legal and accounting fees | Franchise agreement review, due diligence and business structuring |
| Working capital | Funds to cover wages, rent and other expenses until the business generates enough cash |
The franchise fee itself may be relatively modest, but the total investment can be much higher once fit-out, equipment and working capital are included. (See also The Hidden Costs of Buying a Franchise.)
2. Ongoing franchise fees: what you keep paying
Once you’re trading, you may be required to pay several recurring fees.
| Type of fee | Typical illustrative structure |
|---|---|
| Royalty fee | 4%–8% of sales |
| Marketing levy | 1%–4% of sales |
| Technology and software | Fixed monthly amount |
| Administration or support | Monthly fee or percentage of sales |
| Local area marketing | Additional local advertising spend |
| Training | Ongoing training charges |
| Renewal fee | Payable when renewing the agreement, if applicable |
| Refurbishment costs | Periodic upgrades required by the franchisor |
3. Fees are paid on sales, not profit
The biggest issue is that royalties are commonly calculated on sales, not profit. Even if your business is losing money, you may still have to pay the franchisor.
For example, a combined royalty and marketing levy of 8.5% of sales (plus GST, and before any other franchise costs) means a business turning over $1 million pays $85,000 a year to the franchisor, whether it makes a profit or not.
A business that looks profitable before franchise fees may produce a much smaller return once these commitments are included.
4. Why do some franchises charge more?
Not all franchise systems offer the same value. Higher fees may reflect stronger brand recognition, national advertising, established systems, ongoing training, product development and operational support.
However, a higher franchise fee doesn’t automatically mean a better investment. A franchise charging 5% royalties with limited support may offer less value than one charging 8% with strong operational systems, purchasing benefits and effective marketing.
The key question is whether the franchise system generates enough extra sales or operating benefits to justify its fees.
5. Five questions to ask before buying a franchise
- What is my total upfront investment? Include all costs, not just the franchise fee.
- How much will I pay the franchisor each year? Add up all royalties, levies and fixed charges.
- Are royalties payable even when I make a loss? Understand how fees are calculated and collected.
- What additional spending can the franchisor require? Consider future renovations, equipment upgrades and technology.
- Will I recover my investment before the franchise agreement expires? Assess realistic cash flow, profitability and resale prospects.
Under Australia’s Franchising Code of Conduct, franchisors must give prospective franchisees prescribed disclosure information about franchise costs and arrangements. You should generally receive the disclosure document at least 14 days before signing a franchise agreement.
Weighing up a specific opportunity? Our posts on whether a bakery franchise really makes money and how to buy a franchise walk through the numbers to check.
Thinking of buying a franchise?
At Gartly Advisory, franchise accountants in Melbourne, we help prospective franchise owners understand the true costs of buying and running a franchise.
We can help with financial due diligence, business structures, profit forecasts, cash flow planning and reviewing whether the proposed investment makes financial sense.
Before committing to a franchise, speak with Gartly Advisory. Understanding the real costs at the outset could save you from an expensive business decision.
