How do franchising fees work?
Australia is the franchising capital of the world. With over 1,100 franchisors and 65,000 franchise units across the country in 2021, the future of the Australian franchising sector remains bright.
Franchising is a popular business model because it can make starting a business more accessible and more viable. Consider the fact that four out of five independent small businesses fail within their first 5 years whilst only one in five small franchise businesses fail in that same period.
The idea of franchising is simple. Franchising allows a business owner (i.e. the franchisee) to sell products or services under the brand name and systems of a parent business (i.e. the franchisor) for a specified period of time.
Franchising continues to be a growing industry in both Australia and overseas. If you’re looking to start your own franchise business in 2022, it’s extremely important that you get a firm grasp of all the systems and structures that surround the franchising business model.
Franchising fees are just one example of one of the franchising conditions that could either make or break your business. In this article, we’ll answer some of your most commonly asked questions about franchising fees so that you’re left with a better understanding of how it all works.
What is a franchising fee?
Simply put, a franchising fee is the fee that the franchisee pays the franchisor for the right to enter into a franchise agreement. Under any franchising relationship, the franchisee will have to pay a fee to the franchisor in order to receive the rights to use a given trademark, a brand, and/or a system in order to sell products or services.
When you purchase a franchise, you have to pay the franchisor an initial franchising fee which transfers the rights of that particular franchise to you, the franchisee. The initial upfront cost that goes into purchasing a franchise usually isn’t tax deductible, as it’s considered a capital asset.
It’s important to understand that purchasing a franchise isn’t as simple as paying for the rights upfront. Under any franchise relationship, there are other ongoing fees that the franchisee must pay. Some of the other typical fees that commonly appear franchising agreements include:
- Royalty fees – The fees that are paid to the franchisor in return for ongoing support;
- Marketing fees – The fees that go towards a collective marketing and/or advertising spend that is used to promote the brand as a collective body.
- Administrative or IT fees – The fees that go towards administration and other miscellaneous business costs.
Fees associated with franchising in Australia generally include a GST component, granted of course that the franchisor is GST registered. That means that GST-registered franchisees are able to claim a GST credit from the Australian Tax Office (ATO) on the GST included in their various ongoing fees.
How much is a franchising fee?
The fees involved in obtaining franchise rights varies greatly depending on the company and the brand. Initial franchising fees can range between a few thousand dollars on the low end, to tens of thousands of dollars on the high end.
For retail-based franchises like McDonald’s or 7-Eleven, there are usually other upfront costs involved in acquiring a franchise. These include new store fit out costs, training costs, and administration costs. That’s why it’s important to pay attention to the full upfront costs, and not just the initial franchising fee. McDonald’s, for example, requires that franchise owners be prepared to invest upwards of $1,500,000 of encumbered funds, even though their initial franchise fees are only around the $50,000 mark. Costs related to store fit out, staffing, equipment, and training can really skyrocket, so it’s essential that you get a full picture of the financial requirements of a franchise before you take the next step.
What do my franchise fees go towards?
Franchising works because it’s a win-win for both the franchisee and the franchisor. It combines the comparative advantages of the franchisor (i.e. their established brand recognition and economies of scale) with the individual drive and skills of the franchisee.
The initial franchising fee is paid when you enter a franchising agreement. This fee covers the franchisor’s costs of providing the franchisee with resources such as:
- System support;
- Marketing materials;
Ongoing franchise fees, on the other hand, essentially cover the continuous benefits that you receive from the franchisor as a franchisee. These include:
- Value of the intellectual property
- Cost of advertising
- Cost of recruitment
- Cost of training and support
How do franchise fees work for a Jim’s franchise?
At Jim’s Group, we differ from traditional franchise businesses in two big ways. First of all, our franchises are mobile based, not retail-based, which means that the upfront fees needed to acquire a Jim’s franchise are many times lower than the upfront fees needed to acquire a retail franchise.
The upfront costs involved in buying a Jim’s franchise varies depending on a variety of factors. These include things like division, the size of the territory, whether it’s an established business or a new business, and the type of equipment required. A Jims Mowing franchise, for example, usually requires a capital investment of somewhere between $20,000 to $50,000. Considering that just the franchising fee for a McDonald’s business is $50,000, buying into a Jim’s Group franchise is a much more accessible option.
Another way in which we deviate from standard franchising practises is that we never take a percentage of our franchisee’s total sales or profit. Most other franchising companies require that their franchisees pay them an ongoing royalty fee, which is usually calculated as a percentage of sales or profit. At Jim’s, we want our franchisees to keep more of their hard earned money to themselves, which is why our ongoing franchising fees are, and will always be, fixed.
We like to keep things simple here at Jim’s Group. The only fees you’ll be paying on a regular basis as a Jim’s franchise owner are:
- Monthly franchising fee – This fee covers the continuous benefits you receive as a franchisee, including brand name, logos, systems, and franchisor support. Again, this is a fixed fee, not a percentage of your profit, sales, or revenue;
- Advertising fee – This fee goes towards a collective advertising fund, so that we can advertise the brand as a united force and bring in new customers across all our regions;
- Cost per lead fee – This fee covers administration and call centre costs involved in taking in new leads. When you need new customers, we’ll send you new leads for a low price (usually between $9-$18 per lead). After the first year or so, most of our franchisees don’t need the extra help, so they don’t have to pay this fee at all!
If you’re considering buying a flexible, lifestyle-oriented franchise business this year, get in touch with us at Jim’s Group. We have more work than we can handle, so we’re always on the lookout for new, motivated people to join our growing family. Contact us today on 131 546 or enquire online to discuss next steps.