102
Franchisee rights
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Are you paying too much
for your franchise?
Manzoor Ishani looks at the rules and issues surrounding that crucial
bugbear of franchising – the payments
T
HE GOLDEN rule of franchising, as we all know, is that franchisors for a royalty type payment. The franchisee accepts that if things go badly he or
should structure their franchises in such a way that they stand to she may be stuck with what is essentially a high overhead.
make money only if their franchisees make money. This ensures that But is such a scheme justi able? The answer is yes, in certain circumstances
franchisors have a vested interest in seeing their franchisees’ businesses grow. and depending upon the nature of the franchise. Such a scheme is most
Another golden rule of franchising (franchising is full commonly found in low tech franchises which are
of golden rules) is that a franchisor should not extract
“What if a franchisor
uncomplicated, where the franchisor has little to give to the
payment from its franchisee, by way of pro t for the requires payment of franchisee by way of ongoing support once the training is
franchisor, from more than one source. For example, if the
a xed fee from its
completed and which involves cash transactions. Domestic
franchise consists of the sale of products which a franchisee cleaning services such as Molly Maid is a good example of
is required to buy only from the franchisor and these are
franchisee irrespective
this. If the fee is xed at a sensible level there will be suf cient
sold to the franchisee at a pro t, then it would be wrong of the level of the pro t for the franchisor to obtain a good return and maintain
for the franchisor also to extract an additional fee from a
franchisee’s turnover?”
a continuing interest in its franchisees and their prosperity.
franchisee which is calculated as a percentage of the gross After all, in such circumstances, if a franchisee isn’t making a
turnover of the franchisee (unless the cost of those products is deducted success of it and decides to walk away the franchisor will lose its fee and it is
when calculating the gross turnover) otherwise the franchisor will be taking hardly likely to pursue what is usually a “man of straw” for damages.
a pro t from both ends of the transaction, i.e. from the purchase of the The second is a royalty type payment taken by a franchisor as a
product by the franchisee and from the sale of that very same product by the continuing franchise fee but with a minimum. This is an entirely different
franchisee to its customer. So far so good. But what if a franchisor requires matter and should be treated with great caution. Again much depends
payment of a xed fee from its franchisee irrespective of the level of the on the nature of the business and the circumstances but the burden of
franchisee’s turnover? justifying such a structure is considerably more onerous for the franchisor.
Such a structure is not unethical per se but it is frowned upon and it does On the odd occasion that one comes across such a structure (and they
place upon a franchisor an obligation to justify its need for such a structure. are rare) the level of the xed minimum fee is usually extremely low, so
Two types of such a structure seem to be the most common. The rst is low in fact that as a percentage of the franchisee’s turnover, it is slightly
where a franchisor imposes a xed fee on a franchisee by way of a continuing above the franchisee’s break even point. Furthermore, there is usually a
franchise fee. The xed fee structure is very simple. It requires the franchisee quid pro quo in that in return the
to pay to the franchisor a xed sum every month or every week. The franchisee is granted some degree
manzoor ishani is a
structure usually provides for some form of uplift during the period of the of territorial exclusivity. senior consultant solicitor
agreement, usually annually and usually by reference to some formula. The As stated above, xed fees are
with Sherrards (Solicitors),
disadvantages of a xed fee structure are obvious. rare but nevertheless, they do exist.
a commercial practice
advising franchisors and franchisees
There are, however, some advantages depending upon the nature of Prospective franchisees should
in the UK and internationally (01727
the business. The franchisor does not have to worry about the process of tread carefully and need to base
832830,
mgi@sherrards.com; www.
veri cation, the monitoring of the franchisee’s turnover levels etc. and the their decision (as to whether or not
sherrards.com). He has specialised in
franchisor receives a regular income irrespective of economic conditions to buy a particular franchise) on franchising for more than 30 years
and if it gets the formula right, the effects of in ation will be taken care of. sound professional nancial advice.
and is a former member of the Legal
The franchisee can treat such a fee as a xed overhead and this can act as Franchisors who are tempted to go
Committee of the British Franchise
a motivation for the franchisee who knows that the greater his turnover the xed fee route need to be aware
Association. He is co-author of
Franchising in the UK, Franchising in
the larger will be the proportion he can retain. As long as the franchisor is that it is a practice that does not
Europe and Franchising in Canada, and
not avaricious and the fees are xed at a sensible level it has appeal to both meet with ready acceptance and is
has helped UK companies franchise
parties. The franchisor accepts the risk that when things are going well the one whereby it will be called upon to
into more than 27 countries.
franchisor will make less money than it otherwise would have had it opted justify its choice of fee structure. �
February 2009
www.businessfranchise.com
BF102_Manzoor_Feb09 x.indd 1 7/1/09 13:54:32
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