A franchise fee is a fee or charge that one party, the franchisee, pays another party, the franchisor, for the right to enter in a franchise agreement. Generally by paying the franchise fee a franchisee receives the rights to sell goods or services, under the franchisor's trademarks, as well as access to the franchisor's business processes. Often, the franchisee fee includes some assistance from the franchisor in opening the franchised business. [1]
The fee typically consists of a lump sump payment plus ongoing royalties which are typically 5-10% of turnover.
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Accounting for Franchise Fees
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Franchise Fees and Royalties
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Franchise Fees Accounting (Initial Down Payment With Annual Payments, Unearned Vs Earned Revenue)
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Scope
By joining a franchise, an investor or franchisee is able to run a business under the umbrella of the franchise.
The franchisee must pay a franchise fee, which may become costly. In the United States, it may amount to thousands of dollars.[2] In return, the franchisee may enjoy the use of the franchisor's system and name for a limited time, as well as assistance. Such help includes location assistance for the outlet.[2] The franchisor may provide initial training and an operating manual.[2] Then the franchisor may also advise the franchisee on management, marketing, or personnel.[2]
Through paying the franchise fee and joining an established franchise system, the franchisee may be entitled to significant cost savings from suppliers. However, there are major franchise systems like Quiznos who received rebates from suppliers and did not pass along the cost savings to the franchisee. It is required by law to disclosure rebates and related payments that the franchisor might receive from suppliers in the franchise disclosure document.
Payment Methods for the Franchise
Fees involved in acquiring and maintaining a franchise include:
Lump sum payment
When buying a franchise a lump sum payment may be required, encompassing payment for the right to use a product, brand, and business model.[3]
Royalties
Royalties are periodic payments, often paid monthly, for the continuing permission to use the franchisee's brand and products. The royalty is usually 5-10% of the turnover.[4]
See also
References
- ^ "A Consumer's Guide to Buying a Franchise". Protecting America's Consumers. The Federal Trade Commission. Retrieved 29 September 2021.
- ^ a b c d USA Federal Trade Commission
- ^ Klein, Benjamin (October 1995). "The economics of franchise contracts". Journal of Corporate Finance. 2 (1–2): 9–37. doi:10.1016/0929-1199(95)00003-Q.
- ^ "Ready-made franchise business". ubclawreview.org. Retrieved 2022-10-19.
External links
- Federal Trade Commission resources
- "Turn your business into a franchise: Franchise fees and royalties". Business Link. UK Government. Archived from the original on 10 June 2011. Retrieved 17 September 2010.
This page was last edited on 1 May 2024, at 22:19