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Franchising

Franchise fees explained: what you pay up front and every month

Franchise fees include a one-off initial fee and monthly fees, often a share of sales. Here is what each covers and how to compare fee models.

Reading time 5 min read
Category Business guides
Written by The bizbritain team
Franchise fees come in two kinds. The initial fee is paid once, when you join the network. The ongoing fees are paid every month for as long as you trade. The monthly fees usually decide whether the business makes money, and they are what a lender checks in your forecast.
This guide explains what each fee covers and how to compare two very different fee models. It also covers how the fees affect what you can borrow.

Section 01

The initial fee and what it should cover

Almost every franchise agreement asks for an initial fee. It buys your place in the network.
What it includes varies by brand. Some franchisors include training, launch marketing or an opening stock of products. Others charge for those separately.
So ask for a written list of what the fee pays for. Then ask what else you will pay before you open.
The initial fee is rarely the biggest cost. Fitting out premises, buying equipment or a van and keeping enough working capital usually add up to more.

Section 02

How do ongoing franchise fees work?

Ongoing franchise fees are set out in the franchise agreement. They usually include some or all of these five.

  1. Management service fee or royalty

    This is usually a percentage of your sales. Some brands charge a fixed monthly or weekly sum instead. Others charge whichever is higher of a fixed minimum and a percentage.

  2. Marketing levy

    This pays for national or regional brand marketing. It is often a further percentage of sales.

  3. Supplies

    Some franchisors require you to buy products through them or approved suppliers. The price can include a margin for the franchisor.

  4. Technology and systems

    Some brands charge for booking, software or till systems.

  5. Renewal and transfer fees

    These are charged when you renew the agreement or sell the franchise.

VAT is usually charged on top of these fees. Whether that is a real cost depends on whether your business is VAT-registered. Our help page on VAT on franchise fees explains how it works.

Section 03

Comparing a no fee franchise with a traditional one

Some brands now advertise franchises with no initial fee. That can lower the cash you need on day one.
It does not mean the franchise costs nothing. The brand still needs to earn money from the network, so check how it does that.
The fair test is the total you pay over the whole agreement. Five years is a common length for a first term.
Myth 01

“A franchise with no fee is always the cheaper one”

Here is a simple example with made-up figures. Brand A charges a £20,000 initial fee and takes 6% of sales. Brand B charges no initial fee and takes 8% of sales.

Say the business sells £200,000 a year. Brand B costs £4,000 a year more in fees. Over five years, that is £20,000, the same as Brand A's initial fee.

Compare the fees over the whole term, not on day one.

Supply margins matter too. A brand with low fees may earn more from the products it sells you.

Section 04

How franchise fees affect what you can borrow

A fee based on sales is paid before you make a profit. You pay it in a slow month as well as a busy one.
Lenders check whether you can afford the repayments after every fee is paid. So your forecast must show each fee, month by month.
Three steps help before you apply.
  • Ask the franchisor for every fee in writing, with how each one is worked out.
  • Ask existing franchisees what they really pay in total.
  • Ask a franchise solicitor to check the agreement before you sign.
Our guide on writing a franchise business plan for a finance application shows how to lay the fees out.
When the numbers are ready, we can help you look at funding for a new franchise. We can look at the deal across a wider range of lenders. For an eligible founder, that can include a Start Up Loan.

This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.

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