What ongoing fees and royalties does a franchisee pay?

The cost of owning a franchise continues after the opening. The Canadian Franchise Association lists, among the key responsibilities generally required of franchisees, paying a fee to the franchisor for the right to use its trademarks and business system, and describes that fee as typically an initial franchisee fee plus ongoing royalties. No general rule fixes the amounts. They are whatever the franchise agreement says, so the useful question is where to find them and what to ask.

Continuing payments define the relationship

British Columbia’s Franchises Act defines a franchise, in part, as a right to engage in a business in which the franchisee is required by contract or otherwise to make a payment or continuing payments, whether direct or indirect, or a commitment to make them, to a franchisor or a franchisor’s associate. The definition has further conditions about trademarks, control or assistance, or distribution rights, and subsection 1(4) excludes certain purchases. Because indirect payments count, ask about every payment, not only the one called royalty. Other provinces word their own statutes differently.

Advertising fund contributions

A franchise agreement can require a contribution to an advertising fund. Where the contribution is a condition of the agreement, Ontario’s regulation requires the disclosure document to include the percentage of the fund spent on national campaigns and local advertising in the two preceding fiscal years, a projection for the current fiscal year, and whether reports on the fund’s advertising will be made available. Ask whether the contribution is on top of the royalty or part of it, and who controls how the money is spent.

Payments through purchases

The Ontario regulation also requires the document to describe the franchisor’s policy, if any, on volume rebates, whether the franchisor or its associate receives a rebate, commission, payment or other benefit from the franchisee’s purchases of goods and services, and if so whether it is shared with franchisees. If you must buy supplies from the franchisor or a named supplier, ask for that policy in writing.

Where to look, and what to compare

Start with the disclosure document and the agreement, then compare them with what current franchisees tell you. The Association notes that the franchisor benefits through ongoing fees, so ask franchisees what they pay in total each month. A one-time exit cost is a separate question; for that, see what it costs to sell a business.